Key findings of the FCA’s pension transfer advice examination. This week in regulation


The Speed Read:

  • Key findings of the FCA’s latest examination of pension transfer advice
  • Delivering clear, fair outcomes for insurance customers through IDD
  • FCA publishes findings on long-term mortgage arrears
  • Decision notice against former bank CEO published

Key findings of the FCA’s latest examination of pension transfer advice

Pension transfers, and the associated advice, has been a significant area of focus for the FCA with the supervisory activity conducted last year continuing throughout 2018. The regulator has now published the key findings of its most recent activity, which saw it collect information from 45 firms and conduct file reviews and site visits for 18 of them.

The 18 firms involved in the more in-depth assessment have, between them, given advice to 48,248 clients on their DB pension scheme, resulting in 24,919 transfers since April 2015.

Less than 50% of the advice reviewed was suitable. The regulator is disappointed to find that, despite repeated feedback, the industry is still failing to consistently deliver positive outcomes. 23% of the files reviewed were deemed to be unclear as they failed to demonstrate why the advice was suitable.

The FCA also reviewed firms’ disclosure and client communications. 62% were deemed non-compliant, driven in part by the way initial and ongoing fees were presented within their standard documentation. Specific failings included:

  • Emotive language used when outlining the scheme’s solvency or eligibility for the Pension Protection Fund (PPF). The scope of PPF protection was also misrepresented
  • Long suitability reports with unclear recommendations
  • Some firms failed to provide clear and fair information about the benefits and drawbacks of DB and DC schemes
  • Some suitability reports over-emphasised the benefits and downplayed the risks of a transfer.

At several firms, the senior management had failed to identify and mitigate the risks associated with DB pension transfers and there was evidence that certain firms had failed to understand and mitigate the conflicts of interest associated with their charging structures.

The FCA also found evidence that risk management and compliance resources had failed to grow in line with the volume of transfer advice being given.

The FCA’s findings are based on targeted supervision, focusing on the most active firms within the market and certain firms where intelligence (e.g. whistleblowing) had been received.

As a result of the FCA’s investigation, two firms have voluntarily ceased pension transfer activity and a further two have amended their business models, surrendering their pension transfer advice permissions. The regulator expects all firms active in this area to review their business model and processes to ensure they don’t exhibit similar failings. Firms should also take steps to ensure their risk management controls are robust and appropriate.


Delivering clear, fair outcomes for insurance customers through IDD

The FCA has published an update on its expectations around the Insurance Distribution Directive (IDD), which replaced the Insurance Mediation Directive (IMD) on 1st October 2018. Although firms are expected to have implemented the necessary requirements to comply with IDD, the FCA is calling for them to continue to consider how customer outcomes can be improved.

A core principle of IDD is ensuring consumers are provided with products that meet their needs. This doesn’t prevent firms from carrying out non-advised sales, nor are they always expected to conduct a detailed investigation into customers’ circumstances. However, the regulator expects all firms to identify a customer’s demands and needs and only recommend products that are consistent with them. The FCA has provided a range of compliant and non-compliant scenarios to help firms understand their expectations in this area.

New rules in the Product Governance Sourcebook (PROD) mean that all firms involved in manufacturing insurance products must meet the requirements around product governance and oversight. Firms are also required to go through an appropriate product approvals process when new products are developed or significant changes are made to existing products.

All financial services firms are expected to act in the best interests of their customers. The IDD extends this by introducing an explicit rule requiring firms to act honestly, fairly and professionally in their customers’ best interests, regardless of whether this is the end customer or not. This rule applies to all insurance policies, whether a stand-alone policy or sold alongside another product (e.g. add-ons).


FCA publishes findings on long-term mortgage arrears 

There is a growing trend of increasing numbers of long-term arrears cases, while the number of repossessions has been falling. In its Business Plan 2017/18, the FCA committed to examine whether there was a risk of consumer harm from extended forbearance. The FCA has now completed its investigation and concluded that consumers aren’t experiencing widespread harm from extended forbearance.

The FCA’s findings included:

  • Firms were agreeing reasonable arrangements with customers on sustainable terms
  • Firms did consider customers’ individual circumstances and took a sensitive approach which kept the customer engaged throughout
  • Some firms had dedicated call handlers, or sub-teams, to provide a consistent point of contact
  • Some forms had adopted an end-to-end quality assurance (QA) process to better evaluate the suitability of customer outcomes.

However, there were isolated examples of harm, including:

  • Incomplete record keeping
  • Inconsistent handling of vulnerable customers
  • Inadequate reviews
  • Inaccurate customer communications
  • A failure to consider alternative options
  • Narrow QA processes
  • Unnecessary barriers to engagement.

Firms should review their practices in light of the regulator’s findings. Those involved in the review have been provided with individual feedback and the regulator is considering whether further action is necessary.


Decision notice published against former bank CEO

The FCA has published its decision notice against the former CEO of a UK branch of an international bank for failing to take reasonable steps to mitigate the anti-money laundering risks arising from a poor culture of non-compliance. The FCA believes that the individual failed to act with due care, skill and diligence. The decision notice follows action taken against the bank and its MLRO in 2016.

The decision has been referred to the Upper Tribunal, which will determine the appropriate action for the FCA to take.

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