21 November 2018

The FCA has published its latest final rules and guidance in relation to pension transfer advice in policy statement 18/20 (PS18/20).

By way of background, since pension freedoms were introduced in 2015, there has been a significant upsurge in the number of pension transfers, which has led to a need (and sometimes a requirement) for pension transfer advice.

The impetus behind the policy statement is the FCA’s concern that many consumers may be receiving unsuitable advice before transferring away from their defined benefits (DB) pension. There are concerns that with inadequate advice, consumers are not aware of the valuable benefits they could lose on the transfer of their DB pension.

This policy statement is the latest instalment in the FCA’s work in this area and follows CP17/16 (June 2017) and PS18/6, which was published in March 2018.

The FCA consulted on further changes to the rules and guidance in relation to pension transfer advice in CP18/7 and is proceeding with the majority of the changes that were proposed.

What are the changes being introduced?

Qualification standards

Investment advice qualification

Going forward, pension transfer specialists (PTS) will not only have to hold the PTS qualification, they will also need to have the Level 4 qualification for providing advice on investments.

While a PTS may not always be giving the investment advice associated with a pension transfer, they should be able to identify, in the context of the overall pension transfer advice, whether the proposed scheme and investment is consistent with the client's needs and objectives for the proposed transfer.

If PTSs do not hold the qualification they will have until 1 October 2020 to get it. There will be no grandfathering onto the new qualification standard.

More to come?

Of course, a PTS must supplement their knowledge by keeping up to date with the most current market trends, and the Training and Competence Sourcebook already gives firms responsibility for reviewing the competence of their employees to ensure they are competent.

This requirement will also form part of the Senior Managers and Certification Regime, due to be implemented for FCA solo-regulated firms from December 2019. In the PS, the FCA noted it is giving further thought to whether PTS might be made subject to prescribed CPD requirements.

Changes to preparing to give advice

Separate advisers

The FCA’s current rules do not prevent two separate advisers advising respectively on the pension transfer and the destination investments.

However, it is to introduce further guidance which sets out the expectations as to how such advisers should work together to:

  • collect necessary information
  • undertake risk profiling
  • consider the impact of the loss of safeguarded benefits on the ability of the client to take on investment risk.

These changes came into force immediately.

The FCA made it clear that where a firm is operating a two-adviser model, it needs to make the role of the advisers and the fees involved clear to its client. The FCA noted that both it and the FOS have a shared understanding of how a two-adviser model works, and so liability for any future investment decision should be able to be determined on the detail of the circumstances at the time and the advice on which the customer relied.

Advising a self-investor

The current rules and guidance do not stop advisers from advising 'self-investors'; that is, clients who choose their own proposed scheme and investments (often to consolidate their pension arrangements). The FCA states in PS18/20 that the expectations in these circumstances are as follows:

  • When advising on a pension transfer, the proposed destination of the funds should be taken into account; a situation when the client puts forward the destination is no different, except that the adviser will have to make clear that the client needs to provide the necessary information about the scheme and its underlying investments.
  • Where a transfer is unsuitable in principle, but not specifically because of the proposed destination, the adviser should explain the basis for the recommendation.
  • Where the transfer is unsuitable specifically because of the proposed destination, the adviser should flag this and explain that a transfer may be suitable if the client selects a different destination for the funds. If the adviser gives an opinion on how to amend the proposed destination, it is likely to be investment advice.

The FCA believes this is clear enough and no further rules or guidance are to be provided.


The FCA will publish perimeter guidance to clarify the boundary between advice and guidance when providing 'triage' services (where firms have an initial conversation with potential customers to give the customer sufficient information about safeguarded and flexible benefits to enable them to decide whether to take advice).

However, the FCA has found that some forms of triage have strayed into the provision of advice rather than information. Furthermore, it seemed clear from some of the responses to CP18/7 that there may still be a lack of understanding of where the boundary between advice and guidance lies, particularly in a pension transfer context (as opposed to advising on investments).

As such, the FCA has added an additional example to the new perimeter guidance, relating to the provision of a transfer value comparator (TVC). If an advisory firm provides a TVC during triage, this is likely to constitute advice.

On the other hand, PS18/20 also confirms that advice is not given merely by stating that, in the FCA's view, the starting assumption is that transferring out of a pension scheme with safeguarded benefits will be unsuitable.

As such it would be appropriate for firms running triage services to state this assumption, then go on to give balanced examples of circumstances where a transfer may be beneficial or harmful.

The guidance on the changes to the provision of triage services comes into force on 1 January 2019.

Changes to providing advice

Assessment of client’s attitude to risk

The FCA’s supervisory work has shown that some attitude to risk (ATR) assessments focus purely on attitude to investment risk, and not the risk of giving up certainty of income. As such, further Handbook guidance is to be published to clarify the FCA's expectations. The new guidance indicates how advisers should consider the client's ATR to the features of both safeguarded and flexible schemes.

Suitability reports for negative recommendations

The new rules will require firms to provide a suitability report regardless of the outcome of their pension transfer advice. Although it acknowledged there any greater cost may be passed to customers, in the FCA’s view a suitability report for a negative pension transfer recommendation is just as valuable as a positive one and provides a useful record of the advice the customer received.

Pension increase assumptions

Changes have been introduced to update the assumptions to be made in the TCV when valuing increases applied to DB scheme benefits. These changes will be introduced from 6 April 2019.

More to come?

In addition to the further work the FCA has said it will do as regards PTS CPD requirements, it is also planning to consider further changes to the Handbook glossary definition of 'pension transfer'. The responses to CP18/7 indicated that the FCA’s original proposal did not achieve the simplification and clarify that was intended.

The FCA is also going to continue its considerations on contingent charging in the pension transfer advice process. In its purest form, contingent charging means the adviser only being paid for the pension transfer advice if the transfer goes ahead.

In CP18/7 the FCA expressed concern about the inherent conflict of interest in contingent charging and noted that its supervisory work suggested that some firms may not be appropriately managing the conflicts in their charging structures.

However the FCA acknowledges that a causal link between contingent charging and unsuitable advice is not clear-cut, and respondents' views to the CP were apparently polarised for and against a ban on the structure.

Due to the complexities and interlinked issues that need to be worked through, the FCA has committed to undertaking further analysis before taking any action. If it considers that changes are appropriate it will consult further in the first half of 2019.

However, the FCA has taken the opportunity to remind firms that there are already rules and guidance in place that cover managing conflicts of interest and charges disclosures. It may well be prudent for firms with contingent charging structures relating to pension transfer advice to revisit these areas if they have not done so recently.

Key contact

Michael Hayles

Michael Hayles Partner

  • Pensions
  • Public Sector Pension Schemes
  • Financial Services

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