Potential conflict of interest remains as rules tightened on final salary transfers

The Financial Conduct Authority has finalised new rules on final salary pension transfers.

The Financial Conduct Authority (FCA) has finalised new rules on final salary pension transfers, in order to improve the quality of pension transfer advice.

The new measures have been introduced in light of the surge in final salary pension transfers over the past couple of years.

The FCA’s new rules require financial advisers undertaking pension transfer advice to have the same qualifications as investment advisers. The FCA said this will ensure advisers consider both the suitability of a transfer and the underlying investments chosen in the event of a transfer taking place.

The regulator has also introduced a requirement for advisers to undertake a ‘robust assessment of the client’s attitude to risk’, including a personalised analysis of the consumer’s options and a comparison to show the value of the benefits being given up.  In addition, a recommendation report must be produced, with advisers explaining why they believe a transfer is appropriate or unsuitable.  

But the FCA stopped short of banning ‘contingent charging’, which prompted criticism from Frank Field, chair of the work and pensions committee.

Under this charging structure, consumers only pay for advice when they transfer out of a final salary pension scheme, which causes a potential conflict of interest, as it could lead to unsuitable advice to ensure a transfer goes ahead and the adviser is paid.

‘Having seen the fate that befell British Steel pensioners, the committee called on the FCA to take urgent action to ban contingent charging,’ said Field. ‘Instead, the FCA has buried this in the long grass, even as unscrupulous advisers are circling like vultures around consumers. It's time the FCA took decisive action to prevent another mis-selling scandal.’

The FCA, however, said that its initial analysis has found that any causal link between contingent charging and suitability is difficult to prove. It added that it will carry out further analysis and look at whether intervention is necessary.

Christopher Woolard, the FCA's executive director of strategy and competition, said: ‘Any changes to our rules on contingent charging could have implications for the supply of advice. Because of the significance of this issue to all stakeholders in the market, we will carry out further analysis and consult on new interventions if appropriate in the first half of next year.’

The interventions from the City watchdog comes three years on from the introduction of pension freedoms, which resulted in a surge in demand to cash in final salary or defined benefit (DB) pension schemes.

According to the FCA, around 100,000 to 120,000 transfers are taking place each year, with an average transfer value of £250,000; one in three consumers who receive advice choose to cash in their financial salary schemes. 

 

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