City watchdog takes aim at financial advisers and urges action on four areas of concern

The Financial Conduct Authority has written to financial advisers, outlining four key areas of concern that are resulting in significant harm to consumers’ financial well-being.

The Financial Conduct Authority (FCA) has urged financial advisers to address four areas of concern that are leading to poor consumer outcomes.

In a letter to financial advisers, the City Watchdog explained its intervention has been triggered following “an increasing number of cases where the actions of firms are resulting in significant harm to consumers’ financial well-being.” It added that “preventing harm is a key priority” and therefore there will be “increased focus on these areas as part of our wider supervision of firms over the next two years.”

The four key areas highlighted, in which consumers of financial advice may lose out, are: receiving unsuitable advice for their needs and objectives, falling victim to pension and investment scams, not receiving redress as a result of the non-payment of Financial Ombudsman Service awards and/or failing firms being unable to compensate consumers, and paying excessive fees or charges for products and services.

Below we run through why each is an area of concern for the regulator.

Unsuitable advice – defined benefit pensions

Top of the list of the four issues highlighted is unsuitable advice, and on that front the principal area of concern relates to defined benefit (DB) pension advice.

Last June the FCA found seven out of 10 defined benefit DB or final salary transfer requests are being approved by financial advisers – a figure that drew strong criticism from the regulator.

The FCA’s stance on DB pension transfers, which is a sensible one, is that the default position should be that a transfer is probably not in a person’s best interest – although there are certain reasons or circumstances when a strong case can be made for considering a transfer. 

At the time the FCA said it found the high proportion of consumers being given the green light to transfer out of their salary-based schemes – which typically offer an index-linked income for life, plus benefits (see below) – “deeply concerned and disappointing”.

The rise in final salary or DB transfers has been labelled by some, including the Work and Pensions Committee, as a “major mis-selling scandal”. It has previously called on the FCA to ban  contingent charging – where advisers only receive payment when transfers go ahead – which it sees as a ‘key driver’ of poor advice. Last summer the FCA put forward proposals to ban financial advisers from only getting paid when a customer moves a pension pot, but this remains a proposal and is not set in stone.  

In its letter to financial advisers the FCA reiterated its stance, saying its expects advisers to “start from the assumption that a pension transfer is not likely to be suitable for your client. You need to ensure you have identified and are managing the risks associated with DB transfer business. This includes any conflict of interest caused by your charging structures, both for advice on the decision to transfer and any ongoing investment advice.”

Pensions and investment scams

Significant numbers of consumers are still being targeted by scammers, despite government a year ago (January 2019) implementing a ban on cold calling related to pensions. While welcomed, one big area not covered by the ban is scam calls made from abroad, which makes it difficult for authorities to track and apprehend those responsible.

There are also exceptions to the ban, including situations when the caller is authorised by the FCA, or is a trustee or manager of an occupational or personal pension scheme, or the call recipient has an existing relationship with the pension provider.

In its letter the FCA urged financial advisers to continue playing an important role in helping prevent scams, and to report firms or individuals when suspicions arise.

Firms being unable to compensate consumers

The third area concern highlighted by the regulator is that some financial adviser firms are holding inadequate financial resources, which for example could be a result of not holding professional indemnity insurance.

The FCA adds: “This has been an issue with a number of the firms assessed as part of our work on DB pension transfer advice. Where this is the case, it increases the risk of firms being unable to put things right where they have caused harm to their clients.”

Charges for products and services

The final area the FCA shines a spotlight on is charges. It says further work will be carried out in due course to assess the outcomes for retirees who have taken advantage of the pension freedoms.   

The FCA has called on advisers to ensure the advice they provide is suitable, costs and charges are disclosed clearly, and the advice given is in the best interests of clients.


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