In this piece Paul Dyer discusses the latest FCA intervention in the defined benefit (DB) transfer advice market and takes a view on how advisers can exercise best practice in the arena
I have been fortunate enough over the years to work with an array of financial advice firms, the professional services firms that provide support and the regulators that oversee them. While the market, channels and standards for financial advice have been susceptible to change, the underlying requirements of good advice are well established, namely that in order for it to be suitable it has to be consistent with the client's circumstances and objectives.
In planning and policy circles, a ‘wicked problem' is one that is near impossible to solve because the parameters are constantly in flux. Any action taken can therefore change the dynamic of the underlying issue itself, exacerbated by different perspectives and bias. A ‘wicked mess' represents an interrelated web of these problems, each one geared to compound another.
This theory seems pertinent to the current situation with defined benefit (DB) pension transfers, where there is complexity at every level and no ideal solution. Clients and regulators are ever more demanding, driven by a need for freedom and choice and against a market context in perpetual motion. Even stakeholder perspectives can contain levels of intricacy, laced with accountability, pride in defending standards, regulatory risk aversion and strong commercial interests.
Earlier this month, the Financial Conduct Authority (FCA) confirmed a package of targeted measures to address crystallised harm in the DB transfer market. While the changes to contingent charging were largely expected, the timing, tone and breadth of the FCA's response will have come as a shock to some. Given the nature of the problems at hand, the measures also create the potential for unintended consequences.
The problems at hand
The combination of increasing life expectancies, low interest rates and difficulty building up savings has created a serious challenge for consumers, but a significant opportunity for financial advisers. In response to the scale of accrued potential harm, the FCA has repeated the mantra that a transfer starts unsuitable until evidenced otherwise.
This has had variable results, with an FCA investigation showing that, even after repeated intervention, only 60% of advice had a clear supporting rationale and evidence, with approximately 28% having material information gaps, and the remainder being unsuitable.
To address the perceived information asymmetry that exists in the transfer advice process, the FCA has produced an ‘Advice Checker' and is removing perceived conflicts of interest in commission structures. However, these may conversely whip up more uncertainty and complexity, at a time of poor-performing financial markets and increased vulnerability following the Covid-19 pandemic.
The problem is also made more problematic by:
- Multiple stakeholders, each with their own priorities and perspectives being mis-aligned from the outset, potentially compounded by the introduction of claims management companies' interests;
- The ‘craft' of financial advice and complexity around determining suitability. While the sophisticated nature of advice, individual retirement goals and the unpredictable context that we operate within is subjective, market performance, clarity of retirement outcomes and burden of proof all have the potential to complicate the delivery of a ‘right outcome'. This can be exacerbated by information asymmetry and poor record keeping;
- Any attempt to resolve an advice gap at first glance is not only costly but has the potential to generate and change problems in and of themselves. The redress ‘fix' is primitively geared towards financial recompense, rather than putting the customer back in the situation that they would have been in. This offers an incentive to simply challenge advice for financial gain;
- Professional indemnity cover becomes more expensive and elusive for those firms working to support better retirement outcomes.
Understanding that continued success is a wicked rather than linear challenge is an essential first step and will help firms to develop a longer-term strategy to mitigate potential fallout.
Ensuring best practice
Talking in an upcoming podcast for Huntswood, former pensions minister Baroness Ros Altmann, a member of Huntswood's Advisory Panel, said: "The regulator has not been as clear as many providers would have hoped in explaining what it expects them to do, with a number saying that they're not exactly sure what brilliant compliance looks like. That's a problem."
‘Brilliant compliance' demands a focus on outcomes rather than process. Determining whether advice is suitable or unsuitable requires more than a binary response, with consideration given to both remediation where loss exists and mitigation where potential harm has not yet crystallised.
If viewed from a fresh perspective, financial advice firms have an opportunity to proactively review their processes, understand their exposure and take steps to ascertain and reinforce the validity of advice, at both individual client and operating model levels.
To achieve this, firms should look to undertake a past business review to identify whether any issues exist, as well as the scale of any liability. This will lay the groundwork for a comprehensive evidencing procedure moving forwards, with stakeholder perspectives aligned to clear mutual outcomes.
Huntswood is helping clients find a solution that is both efficient and effective, clearly dealing with crystallised harm, whilst allowing for a more sophisticated response where material information gaps exist. This is predicated upon firms taking action now, when they have time and control rather than wait to react to regulatory scrutiny, which will be further reinforced by the FCA's upcoming work on retirement outcomes.
Paul Dyer is head of regulatory risk and assurance at Huntswood
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