Adviser > Individual > FSA Thematic Review – A Suitable Advice Process
FSA Thematic Review – A Suitable Advice Process
Practical implications for
providing transfer advice.
To transfer or not to transfer
The FSA is not suggesting that pension switching should not be recommended. Advising against a switch where it would be in the client's interests would be equally as unsuitable as recommending a switch where it wouldn't.
They are simply stating that where you offer transfer advice you must follow a suitable and consistent advice process. The overall objective of the process must be to achieve the correct outcome for the client. So what should the process look like?
The advice process
We can get a good idea of what the FSA consider to be a suitable process from the procedural failings that they found and documented in their report:
- failing to adequately evidence the customer's needs
- failing to adequately consider the ceding scheme, its options and whether it was able to meet the customer's needs
- failing to ascertain whether the new scheme was more expensive than the old scheme(s)
- failing to explain why the product or the provider was recommended
- failing to consider or discount a stakeholder pension.
FSA suitability template
The FSA also issued a suitability template to assist IFAs.
This template can be used
- to review past files and
- as a simple checklist at the point of sale.
The template covers the following main areas:
Customer needs analysis
The FSA recommend that a full advice process should cover all areas of the client's financial needs. If the advice is focussed on one area of planning the client should understand the possible consequences.
The suitability template asks specific questions about the specific drivers (i.e. objectives) for a recommended pension transfer.
A. What drivers for the pension switch were stated in the suitability report or other documents on file?
- Consolidation Yes/No
- Future drawdown Yes/No
- Investment flexibility Yes/No
- Performance Yes/No
- Specific investment Yes/No
- Switch to cheaper scheme Yes/No
- Other: state in comments Yes/No
Fortunately the template also provides some potential drivers which the FSA clearly considers to be suitable in the right circumstances. The requirement is therefore to carry out a thorough fact-find of the client's financial position and clearly identify what the client wants to achieve, and the advantages of doing so.
Existing benefits
A relatively small proportion of files (14%) were considered to recommend unsuitable advice due to loss of existing scheme benefits. A higher proportion (26%) did not necessarily result in unsuitable advice, but was considered to contain insufficient analysis of the existing benefits.
For example, the template asks:
1.3 For each pension switch did the advice consider any MVAs or penalties that applied on switching out? Yes/No
2.1 Were guarantees in the ceding scheme considered and was there good reason for their loss on switching out? Yes/No
The requirement: Identify if any of these factors apply, and assess their likely impact. Provide evidence that this has been taken into account in the recommendation.
Product recommendation
As mentioned last month, the greatest proportion (79%) of files considered unsuitable contained a recommendation to switch into contracts carrying unnecessary extra costs.
For example the template asks:
1.4 Does the receiving scheme have the features/options that meet the customer’s needs? Yes/No
1.5 Could the features/options/funds have been achieved more cost effectively by a different product? Yes/No
The requirement: Make an adequate comparison of the products available in the (whole of the) market and identify those which meet the client's requirements. Compare costs with both the existing scheme(s) and a stakeholder plan and clearly document the reasons why the recommended product was selected.
Investment recommendation
The review found that 40% of unsuitable cases recommended an investment which was not appropriate to the client's Attitude to Risk (ATR), and specifically mentions that the ATR is likely to be different for clients with different timescales to retirement.
For example, the template asks:
3.3 Is the investment recommendation suitable given the customer’s ATR and personal circumstances? Yes/No
The requirement: Assess the client's individual ATR and create an investment strategy based on the ATR, the term to retirement and the client's financial knowledge and experience. The process should provide consistent results for clients with similar needs and objectives.
Reviews
The review states that an investment portfolio will become unbalanced over time and may no longer meet the client's ATR. It is not necessary to actually carry out reviews, however the client must understand the likely consequences if this is not done.
The template asks:
4.1 Did the suitability report explain the importance (see guidance) of regular ongoing reviews? Yes/No
The requirement: Explain to the client how the balance of the individual investments within the portfolio is likely to alter over time and how this can be addressed via regular reviews. Offer to reassess the client's needs and objectives whenever their circumstances change.
Recommendations
- We suggest that advisers who have not already done so familiarise themselves with the FSA's suitability template and consider using it as a checklist for ongoing as well as past transfer cases.
- We have also prepared a leaflet that can help you complete the FSA's suitability template when recommending a transfer to our Pension Portfolio.
- You should also review your sales process and consider ways in which you could implement consistent practices which will satisfy the FSA's requirements. An obvious area to consider is the use of planning tools such as our risk attitude profiling questionnaire. This tool allows you to identify the client's individual attitude to risk and also directs you to a suitable asset allocation model under our governed portfolios.
Sources:
- Quality of advice on pension switching - A report on the findings of a thematic review. FSA 5 December 2008.
- Investment Quality of Advice Processes II. FSA August 2008.
- Pension-switching advice from the FSA.
Please note the views in this article have been provided by us for our own purposes and the results of any research and analysis are being made only incidentally.
For professional advisers only
