Why I’m getting more worried about Final Salary transfers

It was way back in February that I wrote my first blog. The subject was pension transfers (specifically Final Salary and Defined benefits schemes, to avoid any confusion) and I explained why the whole subject worried me.

Six months on, I’m increasingly concerned.

In that article, I identified four headwinds facing advisers:

  1. Insistent clients
  2. The press
  3. Managing client expectations
  4. Regulatory scrutiny

Currently, advisers trying their very best to do the right thing by their clients, and their business, are often stuck between sections of the media pushing the merits of Final Salary transfers and savers demanding access to their pensions.

Just look at the rise in Google searches for ‘Final Salary pension transfer’. In July 2013 when Pension Freedom wasn’t even a glint in George Osborne’s eye, just 20 searches were carried out. Fast forward to 2017 and the number is over 1,000 per month.

Both of these can be addressed by advisers having suitable systems and controls. It’s the increasing levels of regulatory scrutiny, no doubt triggered by the significant rise in Final Salary transfers, that’s keeping me awake at night right now.

And I have no doubt that many of you feel the same as I do.

Regulatory scrutiny

There’s little doubt the FCA is focusing on Final Salary transfers, so far this year we’ve seen:

  • The regulator publish its: ‘Advising on Pension Transfers’ consultation paper
  • Nine firms visited by the regulator
  • Several firms who offer an outsourced pension transfer service suspend (perhaps temporarily, perhaps not) their services and / or permissions

If any further evidence of the regulator’s interest is required, you need look no further than this weekend’s Financial Times. Megan Butler, the FCA’s Head of Supervision, said: “We’ve certainly seen enough that has given us reason to want to look more widely at this particular question and the issues that we are seeing with advice provided in this area.”

I’ve got no problem with an increase in regulatory focus, if it helps to weed out the bad guys who undoubtedly exist. I do worry though about the effect on the good guys.

Allow me to explain

It’s that time of year when the email alerting you to your latest regulatory bill will drop in to your inbox. The most contentious part is usually the FSCS levy. Partly because it usually rises year on year, but also that we all know the good guys pay for the misdemeanours of the bad guys.

As the questionable advice of the bad guys becomes increasingly evident, with a consequential rise in complaints (which, by the way, will surge if we happen to see a stock market correction and some consumers develop selective amnesia) the ever cash hungry FSCS will need more resources. Alright, let’s call it what it is: Cash.

In the year to 1st March 2017, the FSCS paid out £105 million to 3,565 consumers, who each received unsuitable advice to transfer away from occupational schemes.

My fear is that’s just the tip of the iceberg. How long can the good guys afford to pick up the tab for poor advice given by the bad guys?

The potential bigger risk though comes from PI insurers.

If regulatory scrutiny continues to rise (I have no doubt it will) and claims rates rise (I can’t see them heading in any other direction) how will this affect the PI market?

Logically, premiums for those advisers with pension transfer permissions will rise; excesses will probably increase too. My fear is that things will get even tougher, with PI cover for pension transfers becoming harder, perhaps even impossible to source. If that’s the case, where will it leave Pension Freedom and the statutory requirement for most to receive advice?

I know I’m taking a leap here, but part of my job is to identify potential risks and build solutions.

I hope I’m wrong

If you’re one of the good guys I’m sure you are doing everything right and working with both the letter and spirit of the law. But regular sanity checks on your processes, keeping up to speed with latest developments and continued vigilance are no bad things.

If you’re one of the bad guys, you’re probably not reading this anyway; what I have to say to you really isn’t printable! So, I’ll move on quickly.

Time will tell where this story ends up; I truly hope my fears aren’t realised and that once again the bad guys don’t spoil it for the majority, who are doing the best to provide a secure retirement for their clients.

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