Former Pensions Minister Baroness has commented on
the FCA
report released today which
suggests thousands of customers who were wrongly transferred out
of their Defined Benefit pensions after bad advice may have no
recourse to compensation.
- Shocking FCA findings that many advice firms had no
professional indemnity cover, leaving customers unprotected
against mis-selling
- Waiting till October 2020 to ban Contingent Charging,
downplayed customer protection and put consumers at greater risk
- The ban was needed long ago, as it was obvious that advisers
who only get paid if they advise customers to transfer, can be
biased towards advice to transfer even if unsuitable
The FCA has released updated data about Defined Benefit pension
transfers from 2018 to March 2020, showing that the majority of
advice firms used a Contingent Charging fee structure when
advising clients. This means they only earn a fee if the transfer
goes ahead and, unsurprisingly, the majority of their customers
were advised to transfer.
FCA delayed introduction of Contingent Charging ban to October
2020: It was always obvious, surely, that advisers who only earn
money if their customers transfer, will be biased to advise them
to transfer. This bias could mean customers being told to move
out of their guaranteed pensions, even if it might not be
suitable for them. The FCA discussed banning such charging
structures in 2018, the Work and Pensions Select Committee
recommended a ban, yet the Regulator announced it wanted to
gather more evidence, rather than acting immediately.
Customer interests were not prioritised and many will have
transferred unwisely but their decisions are irreversible: Tens
of thousands of customers were advised to transfer out and may
live to regret their decision. Contingent charging seems hard to
justify. Commission on financial products, which was a root cause
of so many financial scandals which rewarded salespeople for
selling products regardless of suitability, was banned long ago.
It is clear that paying an adviser only if the transfer goes
ahead must skew incentives, but what can customers do if they
have been wrongly advised?
Shocking absence of Insurance Cover means customers may have no
recourse to compensation: The regulator’s data show that 9% of
firms (119 companies) advising on transfers failed to respond to
the FCA survey. Of the 91% who did respond, a shocking 9% had no
Professional Indemnity insurance and 28% had only limited cover.
This means customers who have been wrongly advised may find they
have no recourse to compensation, especially if the firm goes out
of business.
Advice should be charged like other professions – paying for the
time of an expert: Good advisers are professionals who spend
years developing their skills and training, offering huge added
value for customers. They should charge for the advice, without
being biased to any outcome.
If people do not want to pay for advice, they will just stay in
their scheme: Requiring people to pay some thousands of pounds
for a detailed analysis of the risks and benefits of
transferring, in light of their own individual circumstances, may
put many people off, but then the worst that happens is that they
do not transfer - a lower risk outcome for all concerned.
The concept of abridged advice could be funded by the £500
pension advice allowance: In fact, the Government introduced a
little-known and hardly-used £500 Pension Advice Allowance,
permitting pension members to use scheme assets to pay for up to
£500 of advice. DB pension trustees could even consider a ‘scheme
pays’ arrangement that would pay this sum, or even higher
amounts, by reducing the eventual DB pension later if the member
stays in the scheme.
QE has inflated transfer values and there are circumstances where
members should transfer but not without advice: DB pension
transfer values have soared following central bank Quantitative
Easing policies, which leads to eye-watering sums being offered.
For those in poor health, or who are single or who have only a
small pension entitlement in a scheme, there are many benefits to
transferring. A few £20 a week DB pensions could be worth over
£40,000 each and from a financial planning perspective,
transferring some small pensions, if they have other guaranteed
income, can be sensible given the tax advantages of Defined
Contribution relative to Defined Benefit schemes. If the
individual has a large DB entitlement elsewhere, small amounts of
added income are unlikely to materially improve living standards
in later life. But each person needs advice before making this
irreversible decision and advice should not be biased towards
them acting against their best interest.
Need Regulators to be more proactive and act faster to prevent
obvious consumer detriment: I do hope the Regulators will move
towards a more proactive approach to protecting consumers, rather
than the current tendency to be only reactive. Acting long after
thousands of people have been put at risk is not in the public
interest.
Notes:
https://www.fca.org.uk/data/defined-benefit-pension-transfers-market-data-october-2018-march-2020
