The FCA should release its market wide research on the quality of pension transfer advice.

Individuals who have taken out pension transfers, and the decent operators, need to know who is causing the problems and how widespread mis-selling is in the market.

3/3

— Josephine Cumbo (@JosephineCumbo) January 4, 2019

We should not be surprised to find that the market-wide research carried out by the FCA in 2018 is consistent with the spot-checks in 2017. The sample is wider but the results the same.

Jo Cumbo has written a magnificent article based on information she has gleaned from the FCA. If you have an FT subscription you can read it here.

What the findings call into question is how the commercial model of a modern financial adviser can do anything but encourage transfers.

Think about it!

1. The point of wealth management is to deliver added value. If wealth managers did not think they could get more value out of a cash transfer from a defined benefit scheme than the member could have got from the scheme pension, then what would be their point?
2. The point of pension freedoms is that they free us from pensions. If you tell the UK population that from now on they’ll never have to buy an annuity, by extension you endorse not having to suffer a scheme pension either.

I have sympathy for those who run wealth management firms. They have been encouraged to run their businesses in an RDR compliant way , and consider the execution of DB transfers as consistent with Government policy.

Now they are being harassed by a regulator that is part of the Treasury, the architect of pension freedoms and ultimately the Retail Distribution Review. The RDR that has created the opportunities that wealth managers are quite legally maximising.

They aren’t even exploiting the system, they are simply using the tools they have given which include the right to charge for transfer advice on a “no transfer- no fee” basis (contingent charging). They can also point to the fact that as their job is to manage wealth – in managing the proceeds of a transfer , they are only doing their job.

The evidence of a failing policy

It has been over 30 years since the Fowler reforms that first required defined benefit pension plans to offer cash equivalent transfer values to those who asked for them.

We are now into our second cycle of problems with this policy and as far as I can make out, what the FCA is discovering is that if you leave the stable door open, the horse will decide to head for the freedom of the fields- -especially if there is someone to lead the horse the way.

What we are seeing is not so much miss-selling but the implementation of the wrong policy.  When I meet the steelworkers who were misled , I do feel angry that they were exploited by their advisers, but were they criminally exploited?

The advisers were qualified and though many of them have resigned their permissions, most haven’t. They are still free to practice and still free to charge for their services contingent on transfers going ahead.

Though the evidence is that over half the transfers should not have happened, nothing has been done to change the commercial imperative – there is no easier way of creating new customers for a wealth manager than by unlocking a defined benefit pension scheme.

Advisers I speak to tell me that Professional Indemnity insurers are doing more to disrupt the trafficking of DB pensions than the Regulator.

Can everyone be special?

If you turn the argument on its head and look at pension freedoms from a philosophical point of view, it is easy to create an abstract justification for what has happened.

A friend of mine holds that everyone could and should feel special enough to manage their own retirement wealth, he isn’t a financial adviser but a pensions actuary – and a very good one.

He argues that the mass migration of over 200,000 deferred pensioners (and a good few actives too) away from DB pensions is within the law and should not be a matter of public concern. Many defined benefit schemes are technically more solvent for these people’s departure and advisers are only doing for free what many trustees have preciously paid them to do  – de-risk the scheme liabilities.

In this world where everyone is special, we should all have the financial resilience to cope with a market falling 14% in a year – as the UK stock market did last year.  My friend argues that the more people treating themselves as special cases – the better.

Everyone’s special so long as the party lasts

But this is where the argument that everyone is special comes off the rails. People do not feel at all special if they see their £500,000 pension pot fall to £425,000. People taking withdrawals from their pots to pay for Christmas are cashing out of a market that is swinging madly – they are at this moment – playing Russian roulette with their finances.

My experience when I ask people if they’re feeling “special” about taking a transfer in 2017 is that they say they feel frightened and on their own. There’s nothing special about that.

Making transfers special again

I have said this many times and I’ll say it again. The reason we saw nigh on £40 bn. transfer out of DB in 2017 was that it was easier to transfer than to stay in. Contingent charging made the process of unlocking the stable door painless, stock markets looked set to climb relentlessly as they had every year since 2008 and transfer values were at an all time high.

We had one respected financial journalist telling us that if she’s had the right to a transfer value, she’d have taken it.

After a year of worrying about the problem, the FCA has still not banned contingent charging, their remedy for the problem is to provide a number to people thinking of transferring showing the cost of buying back an equivalent benefit through an annuity. It’s a useful piece of information but it’s too little too late.

How do we explain the FCA’s admission that half of the regulated transfers they’ve looked at it in the past year – shouldn’t have happened?

I think the clue’s in this blog. There is a tacit admission that the advisers who are behind these transfers are only exercising their right to manage other people’s money with the conviction – that they must have – that they can do this better than the next man. They are only offering people the right to exploit the freedom that Fowler and then Osborne gave them.  The advisers have done what they were told to do – make every customer feel special.

The FCA should ban contingent charging right now

The FCA cannot ban people transferring out of DB schemes – that’s a right they’ve been given by parliament. Nor can they ban people from cashing out their transfers in a crazy way – that’s a right given them by parliament.

But the FCA can continue to require transfers to be advised and they can changer their rules to ensure that the cost of that advice must be met upfront by payment of a fee before the advice is given.

They could go even further and require that the adviser giving the recommendation, does not profit from the consequences of the recommendation. That would mean banning collusion between the transfer specialist and the wealth manager.

This should have happened two years ago – that’s how long this blog has been calling for a change in FCA regulation. It still hasn’t happened today.

The only way we will make transfers special again , is to require to pay upfront for advice and to disincentivise advisers from recommending a transfer save in special circumstances.

The FCA should release its market wide research on the quality of pension transfer advice.

Individuals who have taken out pension transfers, and the decent operators, need to know who is causing the problems and how widespread mis-selling is in the market.

3/3

— Josephine Cumbo (@JosephineCumbo) January 4, 2019

I don’t think the FCA can release the details of this research without banning contingent charging.