Adviser > News > February 2009 > FSA Thematic Review – Concerns in Context
FSA Thematic Review – Concerns in Context
The FSA's recent review of the quality of advice on pension switching highlights areas of concern. Find out what the FSA consider to be unsuitable in the pension-switching market.
On 5 December 2008 the FSA published the results of its review into pension switching, and stated that the findings were "disappointing"1.
This has naturally set the tone, however whilst there is no doubt the FSA has legitimate concerns, it is worth putting them into context.
Disappointing results
The FSA reviewed 500 files from 30 adviser firms. Across the sample as a whole they found 16% of files contained unsuitable advice. That means 84% of the files reviewed provided clients with suitable advice. That is quite a positive endorsement of the adviser profession.
Significant levels of unsuitable advice
... was provided by some firms. 25% of the firms reviewed had given unsuitable advice in more than a third of the cases looked at. These firms have been contacted and action will be taken.
The biggest group - around 50% - within the firms reviewed were found to have given unsuitable advice in less than a third of instances. This could mean just 1 or 2 files. And of course a further 25% were not found to have offered any unsuitable advice at all.
There was also concern at the variable standards discovered within individual firms.
This is the reason for the FSA writing to over 4500 firms involved in pension transfer business laying out the standards they expect, and for the proposed roadshows in February and March 2009.
So what does the FSA consider to be unsuitable?
Unnecessary costs
By far the biggest issue - 79% of the files considered unsuitable - was the transfer of clients into contracts carrying higher contract charges than the previous plans.
The FSA does not say that it is never suitable to advise a transfer to more expensive contracts, but clients should only be advised to do so where they are getting good value for their money. Extra costs are justifiable where the additions are for additional services that are clearly suitable for that client.
SIPPs are a particular issue. They offer excellent investment choice and are undoubtedly good value for some clients. However it is generally considered that the extra charges associated with SIPPs may only be justified for larger fund sizes.
Only a very small number of personal pension plans - around 3% according to HMRC figures in 2006 - are worth more than £100,000, this would suggest that the extra charges for a self-investment flexibility are not justified for the majority of clients.
Taking this a stage further, it is reasonable to consider the extra option of a deferred SIPP, providing that option does not add extra cost to the client. This means that a deferred SIPP should not be any more expensive than a standard personal pension.
Recommendations did not match the consumer's attitude to risk
The FSA state that advice will not be suitable if the client is exposed to a greater amount of risk than is appropriate for them. Equally if the investments are too cautious investments may not perform as well as expected.
Advisers must show that they have assessed the client’s risk profile, taking into account their personal circumstances and financial awareness, and put in place an investment strategy which is designed to fit with the results. You may use a risk profiler tool to do this, and you may rely on third party expertise for asset allocations and fund selection, but the process must be clear.
Failure to explain the need for ongoing reviews
It is not necessary to offer regular reviews to all clients, clearly it is not economic in some cases. However if you are not going to do this it must be understood by the client. Where a portfolio is not reviewed on a regular basis it is unlikely to remain suitable to the original risk profile and the client could experience unexpected losses in unfavourable market conditions.
The advantage of the review is that it takes into account the clients ongoing circumstances and changing market conditions to ensure risk is within an acceptable level at all times. This is a valuable service for which advisers are entitled to charge, so long as the client has been clearly told what they are paying for.
Loss of benefits without good reason
It is a basic requirement that advisers should check whether any of the ceding arrangements carry any form of guarantee. The FSA allude to guaranteed annuity rates, and of course have provided guidance in the past about defined benefits, however there is one more factor to consider in the current market.
Some clients may be entitled to enhanced PCLS under the pre A-Day regime, something they are likely to value highly. This protection is very often lost on transfer and advisers should take care to look at alternatives which will allow then to keep it.
Next steps
If you are involved in pension transfer business you will probably have received a communication from the FSA laying out the standards of advice it expects to see. You may also be invited to attend one of their roadshows.
Our next edition will look in more detail at the FSA guidance and the processes you are expected to follow.
One thing - you will be expected to do this for existing business in any case so pulling out of the transfer market will not help you to avoid this. There are plenty of opportunities in the transfer market so getting good at it will be a very positive element in your business plan.
Note
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 available only incidentally.
Sources
- Christina Sinclair, Head of Retail Conduct Risk Department’, FSA. “Pensions Switching: FSA demands high standards” Article in Financial Solutions Jan/Feb 2009.
- References in PDF format:
For professional advisers only
