Improving the quality of pension transfer advice: This week in regulation


The speed read

  • FCA introduces new rules to improve the quality of pension transfer advice
  • The risks of money laundering and terrorist financing in the E-Money sector
  • The lessons learned from consumer facing remedies
  • Why the FCA tests its interventions
  • The cycle of deregulation, crisis, regulation
  • FCA issues £16.4m fine following 2016 cyber attack

FCA introduces new rules to improve the quality of pension transfer advice

Following its consultation on improving the quality of advice consumers receive when considering giving up safeguarded pension benefits, the FCA has published a policy statement outlining its final rules and guidance in this area.

The new rules and guidance include:

  • Increasing the required qualification levels for pension transfer specialists (PTSs) so they hold the same qualification as an investment adviser, alongside the existing PTS qualification.
  • Guidance to clarify the regulator’s expectation that advisers explore their clients’ attitude to the general risks associated with a transfer, not just their attitude to investment risks.
  • Guidance on how to carry out an appropriate ‘triage’ service without crossing the advice boundary.
  • The requirement to provide clients with a suitability report, regardless of the outcome of the advice provided.
  • An update to the assumptions to be used when valuing increases applied to DB scheme benefits where there are upper and lower limits to inflationary pension increases.

Pension transfer charging structures 

In CP18/7 the FCA raised the question over whether action needed to be taken to address potential harm and conflicts of interest inherent within pension transfer charging structures, particularly contingent charging.

A small majority favoured an outright ban on contingent charging, with many respondents suggesting alternative methods to mitigate potential consumer harm, including:

  • Strengthening rules on the management and mitigations of conflicts of interest.
  • Greater data requirements for firms operating contingent charging models.
  • The use of independent advice reviewers to provide assurance and reduce poor outcomes.
  • Stronger regulation around the disclosure of fees and charges.

The responses received confirm the FCA’s view that it is difficult to prove any causal link between contingent charging and suitability and that any changes could have a significant effect on the wider industry, particularly around the supply and availability of advice. As a result, the regulator intends to continue its work in this area and consult on any new measures it believes necessary in the first half of 2019.

Contingent charging is certainly a hot topic in financial services and while we don’t necessarily support this model, we believe that a ban won’t necessarily lead to materially better consumer outcomes. Read David Boyhan’s in-depth analysis of this issue for FT Adviser.


The risk of money laundering and terrorist financing in the E-money sector  

The FCA has published the results of its recent thematic work on the risks of money laundering and terrorist financing in the E-money sector. This involved a review of the anti-money laundering (AML) and counter-terrorist financing (CTF) controls of 13 authorised Electronic Money Institutions (EMIs).

Certain features of the products offered by EMIs can increase a firm’s risk of being targeted to further money laundering and terrorist financing, including:

  • Enabling cash loading and withdrawals
  • No usage limits
  • Products that permit multiple card users
  • Products that can be obtained anonymously.

The review has provided the FCA with a clearer understanding of the potential harm which may arise from money laundering and terrorist financing within the market. Its main findings include:

  • The majority of EMIs visited had effective controls to mitigate these risks, with a positive culture and a good level of awareness of their obligations relating to financial crime.
  • Most had updated their policies and procedures in line with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs).
  • The quality of management information (MI) available varied. Senior Managers were more engaged and had a clearer understanding when the MI clearly identified key risks, supported by data.
  • At most firms, automated technologies were used to effectively monitor transactions.
  • Although not in scope of the review, the FCA noted that fraud was viewed as a key risk for providers and formed a significant part of firms’ risk assessments, transaction monitoring and other financial crime controls.

All EMIs involved in the review received direct feedback from the FCA and no formal supervisory action was required. It is recommended that all EMIs review the findings of this report and consider whether their own systems and controls could be improved.


The lessons learned from consumer facing remedies

The FCA and Competition and Markets Authority (CMA) have published a joint report into the lessons they have learned from designing, testing and implementing consumer facing interventions in the financial markets.

The evidence suggests that increasing the supply of information to consumers is not an effective way of improving the outcomes consumers receive. Instead, particularly where complex or long-term decisions are being made, proper levels of support and protection need to be in place.

Following the evaluation of previous interventions, the regulators have outlined a set of high-level principles for their future interventions:

  • Understand the issue: Problems can arise on both the supply and demand side, so a combination of supplier and consumer-facing changes may be required to achieve better outcomes.
  • Be bold when identifying possible solutions: Think broadly about the options available and don’t discount more radical solutions too quickly.
  • Ensure consumers are in control: The most successful remedies are those that recognise the customer is not to blame for poor outcomes. Instead provide a framework, the tools and the right levels of support to make robust decisions.
  • Don’t ignore the private sector: Try to learn from the private sector and involve it where possible.
  • Test: Testing is an important part of the process as it can often highlight where initial assumptions are incorrect.
  • Analysis is not enough: interventions need to take real-life behaviour into account, require effective communication and implementation, balance the needs of different groups and advocate positive policy reform.
  • Review effectiveness: This important final step can provide insight and lessons for future interventions, as well as supporting other regulators facing similar issues.

Markets, supplier behaviour and technology are constantly changing, so regulators need to continue to monitor the outcomes of consumer facing remedies. Two particular areas emerged from the review where further improvements could be made. The FCA and CMA intend to focus on these areas in future work:

  • Consumer diversity and vulnerability: Where price discrimination occurs, the risk is that the most vulnerable may bear the greater costs. The regulators believe this risk should be an important consideration when designing interventions.
  • The digital economy: The changing digital economy presents opportunities, in the form of data-based or personalised interventions, as well as threats, particularly for digitally excluded individuals.


Why the FCA tests its interventions

 Following the publication of the joint FCA and CMA report into the testing of its consumer facing interventions, Christopher Woolard, FCA Executive Director of Strategy and Competition, gave a speech outlining the reasoning behind the testing regime.

The FCA has been at the forefront of testing its interventions and was one of the first global regulators to establish a behavioural economics team. This is because the consequences and effects of policy change are often hard to predict and can lead to unintended results.

Regardless of the testing method used, Mr Woolard outlined three rules of thumb for successfully testing competition remedies:

  1. Test both the diagnosis of the problem and the design of remedies
  2. Measure the precise outcome being aimed for
  3. Pay attention to how the outcomes are distributed across the population.

Finally, he highlighted the benefit of collaboration. Many regulators and industry participants are attempting to address the same issues and some of the FCA’s most successful interventions have occurred in collaboration with others. Ultimately, policymakers are fallible and just because something sounds good in theory doesn’t mean that it will work in practice. Therefore, the FCA will continue its testing.


The cycle of deregulation, crisis, regulation

The cycle of deregulation, crisis, then regulation is a damaging one, argues FCA Chair Charles Randell at the recent AFME Annual Conference. During the speech, he proposed methods to break this cycle and its importance in light of the UK’s exit from the EU.

An International Monetary Fund (IMF) report, published earlier this year, highlighted a number of historical instances where deregulation, also known as liberalisation, has led to a financial crisis. This damages consumer and industry trust in the effectiveness of regulation, and can negatively impact competition and the effectiveness of the regulatory regime.

Mr Randell suggested that one way to break the cycle is to keep an open mind. Not all forms of deregulation are undesirable and holding on to poor regulation can be as damaging.

As this cycle increases the risk of the regulatory regime becoming patchy as new rules are added to address weaknesses, it’s important to review the rulebook as a whole to ensure consistency. Therefore, the FCA has committed to reviewing its Handbook once the post-Brexit landscape is clear and both the regulator and industry have had the chance to adapt to any necessary changes following the UK’s exit.

One safeguard against unjustified regulation and deregulation is evidence-based regulation. While the FCA does conduct cost-benefit analysis for the measures it consults on, these have a very narrow focus and there is always the risk they underestimate the true cost of regulation. Regulation also needs to be assessed on the basis of its real-world impact on individuals, hence the FCA’s ongoing focus on gathering evidence from behavioural economics.

Considering the issue in light of Brexit, the FCA doesn’t wish to join a race to the bottom in regulatory standards. Instead, the regulator understands the importance of engaging with global policy makers as international co-operation can dampen the cycle and reinforce global competitiveness.

The FCA is committed to maintaining high standards and stable regulation. It will also keep an open mind about existing regulations, and is prepared to take action where regulation is not producing the desired outcomes.


FCA issues £16.4m fine following 2016 cyber attack

The FCA has fined a retail bank £16.4m for failing to exercise due skill, care and diligence in protecting its customers from a cyber attack.

The cyber attack, which occurred in November 2016, exploited weaknesses in the design of its debit card, its financial crime controls and its Financial Crime Operations Team, leaving consumers vulnerable and gaining the attackers £2.26m.

The bank was found to have breached Principle 2, as it failed to exercise due skill, care and diligence in the:

  • Design and distribution of its debit card
  • Configuration of its authentication and fraud detection rules
  • Firm’s response to the cyber attack.

Firms are reminded of their obligations to maintain appropriate financial crime controls and standards of cyber resilience. In the event of an attack, a firm’s response should be clear, well designed and well-rehearsed.

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