Tideway responds to the FCA
In July this year (2019) the FCA published a consultation paper on defined benefit (DB) transfer advice seeking feedback from the financial advisor industry on a number of changes to its rules book. The catalyst for the paper is the very negative stance taken by the FCA on DB transfers and its claim advisers are doing as much as £2bn per year of consumer harm.
As a leading firm in the DB transfer advice market, Tideway has responded to this paper and pushed back on its negative stance - which we feel is misguided - supported by the very positive outcomes of our clients who have taken transfers on our advice.
You can read the FCA’s paper here:
Our primary views on CP 19/25:
- Whilst we are supportive of the core initiative to improve DB transfer advice standards in this paper, we are concerned by the general negative stance which ignores the economic benefits of DB pension transfers.
- Far from preventing your estimated £2bn per year of consumer harm, an estimate we think is not likely to be accurate, our calculations suggest that this generic negative stance has the propensity to do as much as £25bn of consumer harm over the next 5 years. Harm that will escalate in value materially in years to come.
- We make these assertions based on the following facts:
- The very negative stance on the benefits of DB transfers taken in this paper is leading to negative press coverage of DB transfers, unfounded opinions as to the merits of the transaction and ‘adviser bias’ with advisers encouraged to recommend not to transfer.
- Most transfers post Pensions Freedoms are forecast to create a better economic outcome for consumers using flexible drawdown in retirement versus staying in the scheme with a relatively modest level of net investment returns. This potential economic gain is completely ignored in the paper and in the approach FCA now appear to be taking to DB transfer advice.
- We have evidence to show that across our client base these economic gains of transferring out are materialising after just 2-3 years and any compensation liability that may have existed immediately post transfer is reducing or indeed has already disappeared. Clients are materially better off as a direct result of the transfer. We see no reason to believe that we are unique in this and would expect to see and have seen that other advisers are having similar experiences.
- Our view is that banning contingent charging will not be effective in removing the conflicts of interest implicit in DB transfers because ongoing fees are far more valuable than initial fees. Furthermore, a ban has the propensity to stop clients engaging with advisers and to have the opportunity to shop around for advice. It may also put financial pressure on some clients to transfer in the latter stage of the advice process.
Our primary suggestions to improve the quality and availability of advice to consumers are:
- Go back to the stance that a DB pension is a valuable asset which should not be given up lightly or without reason. The default position should be to stay in the scheme, but FCA should refrain from generalising whether transfers are good or bad.
- Make it clear to advisers what you consider to be suitable transfers. Point 50 on page 63 sets out 5 scenarios where you think a transfer could be suitable in addition to the 2 carve out scenarios. We agree with these 5 scenarios and think publishing them more prominently would be very helpful in building an industry wide view as to what a suitable transfer recommendation looks like.
- We think you should add to these 7 scenarios an additional 8th scenario where the transfer brings significant, after-tax, economic gains with limited downside risks based on the client’s specific transfer offer, their plans for the funds post transfer, financial position and objectives.
- To better manage the inevitable conflict of interest of both initial and ongoing fees make advisers disclose, before engaging for advice, the likely 20-year earnings of the advising firm and the individual adviser (if their remuneration is directly linked to the firm’s fees from that specific member) of an individual completing a pension transfer.
- To ensure DB transfers are successful for as many consumers as possible we would suggest focusing on:
- Identifying and closing scams as quickly as possible
- Preventing access to unregulated investments via pensions
- Highlight to consumers the extent of the range of transfer offers from different schemes. Ranging from those where economic harm will almost always be done unless individuals can qualify for one or other of your two carve outs, to those where economic gain is all but certain.
For more information please read Tideway’s CP 19-25 Responses (PDF).