The last few weeks of 2018 saw the FCA criticising advisers, yet again, over the suitability of transfers and the regulator in turn facing criticisms that it was being too harsh and and that its figures were skewed by specialist pension transfer firms.
However, speaking to Portfolio Adviser in December, Stuart Fowler, managing director of Fowler Drew, argued that it could be the current approach to suitability that might need an overhaul, suggesting that it needs much more careful projections to properly advise on drawdown in general with transfers a sub-set of the issue.
He said: “The FCA approach to suitability follows what the industry has been doing, asking how do we formalise the process and test for its adequacy? But for anything with a specific goal, then the existing suitability process may not do the job. There is nothing to indicate the FCA realises that.”
Advisers and planners accept there are contradictions in the current system.
William Burrows, retirement director at Better Retirement, says: “The issue is that comparing replacement income is a quantitative issue – e.g. giving up £3,500 per annum index-linked means taking 3.5% income withdrawals from a £100,000 pot and requires an investment return of 3.5% after charges to preserve capital. However, the benefits of £ 3,500 p.a. index-linked or £100,000 that can be taken flexibly and can be left to children involve subjective issues.”
Suitability letters baffle clients
Discussing suitability letters, Burrows says: “If you ask ‘do most people understand the suitability letters they are given?’ the answer is probably no. You have two opposing demands, one is to make sure everything is properly documented, and the other is can they understand it?
“A lot of the advice is of a technical nature – it can be documented that there is a proper analysis but a lot of it is subjective and behavioural. The holy grail is advice that the customer can understand that explains the technical aspects and takes into account the behavioural aspect.
“The adviser has to look the client in the eye and say, ‘Do you really understand the guarantees you are giving up and do you really understand the risks you are taking in order to have all this flexibility.’”
Pensions as a source of capital
Perceptive Financial Planning director Phil Billingham says: “I am old enough to remember when drawdown was a deferred annuity. All our systems were based on that premise. Even the new TVC (transfer value comparator) is still premised on giving up an annuity.
“But it is almost four years since the government changed the rules – pensions are no longer income, they are capital including all sorts of stuff saying it was a bank account. The problem is that has become the culture.”
Billingham says that for him it is pension transfers which remain the ‘upper case’ issue with perhaps a ‘lower case’ issue for defined contribution pots, but the problem remains that people now regard the pension as a source of capital not as something to generate income.
He is also concerned that the definition of suitable in the public’s mind and indeed what the government has implied is suitable, diverges from what the FCA requires.
“I think there has been a divergence between what is actually suitable for the client in terms of what they want, and what they feel is in their best interests and what they feel capable of giving informed consent to, and then suitability in terms of the outcome the regulator would prefer to see. That is not to excuse some of the bad practice like transferring DB pensions into unregulated collective investments. I am not defending any of that for a second.”
Yet he says the current regulatory assumptions make it difficult for advisers.
“If the regulator’s definition of suitability is to almost always keep the annuity-based scheme and never release capital even if someone wants to leave something for their family, you have to place alongside that the fact people say, ‘I have now been told by a chancellor of the exchequer that it is a capital sum’. They think: ‘I am entitled to have it’.
“But the other side is ‘I am not allowed to have it unless I have been told it is suitable by an adviser’. As an adviser, there is nothing I can say. I agree with you, but the regulator tells me I am not allowed to say it is suitable. There are, in many ways, two different standards of suitability.”
One-off advice becomes redundant
Consumer campaigner and director of the Financial Inclusion Centre Mick McAteer says: “I have always argued that this is the problem with the freedoms. You can no longer take one-off advice. You need to monitor closely whether you are drawing down too much or whether markets have performed to expectations. It requires more regular monitoring and updates.
“I don’t know how the FCA would account for that apart from saying they must do regular reviews. So, I don’t think the FCA could come out with a whole new set of requirements apart from regulator reviews.
“Freedom and choice brings with it a whole new set of problems in terms of revising your projections and your assumptions – that is part of the package these days.”
Three questions on transfers
CanScot partner Robert Reid says many of the issues with transfers stem from a failure to sort out triage and the FCA viewing the transfer as a binary decision. He says he suggested three questions.
“If someone says they want to transfer – your first question is: Have you got any other pensions apart from the state pension? If they say no then you can say there is no point looking at it.
“If someone says they have other pensions, then you ask: How do you feel about a fluctuating income in retirement? Could you cope with having to cut back occasionally or do you need something steady? If it is the latter, then leave it where it is.
“Then the final question is: Are you prepared to commit to regular reviews? Again, if they won’t do that, then it’s a no.”
He adds: “You have a far more complex set of decisions and it is not binary, but the FCA wants it to be binary. You can’t create your version of reality. People are looking at different drivers and you have to ascribe a level of risk to each of these drivers. Some of them are mutually exclusive, some want to be able to vary income in retirement, but they don’t want to lose any value from their investments.
Reid says the “other elephant” in what is becoming quite a crowded room is self-investment.
“The FCA does not know what to do with this. I could do a suitability review based on, say, HL’s charges and say that is OK. But if the client goes away and does something completely crazy, or you leave it in cash, what do we do then? It might not be the adviser’s fault, but it isn’t clear.”
Taking a lead from Naomi Campbell
Reid has also increased the price of doing a report.
“Advice is now more complicated. My average fee used to be about £3,000 for a report, but given what I have gone through in the last three months, I am not going to get out of bed – as Naomi Campbell used to say – for less than £5,000.”
He says it is difficult even for wealthy clients with lots of other assets to transfer from a compliance and regulatory point of view.
“The problem is that on an FCA visit, they have been looking at the transaction in isolation. The difficulty is we have a regulator that has been regulating products for years – the main reason being that there isn’t the skill set in the FCA to regulate advice.”
