The FSA introduces an Optional Compliance Test for Phase 2 transfer cases

http://www.fsa.gov.uk/pensions/oct-polguide.pdf (111kb)

The test, which is called the Optional Compliance Test (OCT), follows representations from firms during last years consultation on phase 2 (CP7). Respondents to CP7 had argued for an alternative compliance assessment process to include a specific test to assess the financial credibility of the transaction in the conditions prevailing at the time of advice. The OCT, therefore, seeks to establish two things:

whether the transfer was financially viable at the time of sale (a Financial Viability Test);

whether the investor was appropriately advised (in the light of rules in place at the time) on the nature of the transaction and its associated risks.

Guidance is provided for the conduct of the Financial Viability Test and materials (a questionnaire and factsheet) are provided to assist firms in gathering information from investors to assess the quality of advice. The materials were published in draft as a part of the public consultation on the OCT (CP21) earlier this year, and have been revised following consumer research.

A statement containing a summary of the responses to the consultation and results of the consumer research will be available by the end of August.

Notes for editors

In determining whether redress is payable in respect of a personal pension sold between 29 April 1988 and 30 June 1994, reviewing firms must consider two questions:

was the advice given compliant with regulatory rules in force at the time?

if not, has that (non-compliant) advice caused a financial loss?

The guidance published today focuses on a procedure for firms to use in assessing the answer to the first of the two questions above.

The standard compliance assessment for transfer cases consists of four sets of tests:

Test 1: Know your customer and suitability

Test 2: Adequate information

Test 3: Explaining the risk

Test 4: Fair and not misleading literature/projections/statements

Where a firms client file is insufficient to demonstrate compliance in each area, it will be necessary for the firm to gather information to determine whether or not the transaction was compliant.

In July 1995 the PIA introduced a more streamlined approach to the information gathering and compliance assessment of case reviews for transfers, called the Optional Streamlined Test (OST).

The OST contained three parts an assessment as to whether the transfer transaction was a reasonable financial proposition in the light of investment conditions at the time advice was given (known as the Financial Viability Test); a check of the investors file held by the firm to establish whether there was any demonstrable failure of compliance; and a review of the answers given by the investor to a short standard questionnaire. A transfer could only be deemed compliant if it passed each of the three parts of the test.

The Optional Compliance Test builds upon the OST introduced by the PIA, principally through the creation of a new set of investor materials (letter; factsheet; and questionnaire) which firms using the test will need to send to the investor concerned to gather information.

A public consultation paper (CP21) on a revised streamlined test the Optional Compliance Test was published on 24 March 1999.

http://www.fsa.gov.uk/pdf/cp21.pdf (117kb)

The model guidance issued by the FSA today is addressed to all front-line regulators (SROs and RPBs) and to directly regulated firms. The PIA (whose members account for the vast majority of pension review cases) has already considered and adopted the guidance to apply to its members. It has also been adopted by the SFA and IMRO.

The priority review included transfers where the investor was aged over 50 (45 for females) at the time the advice to transfer was given. The phase 2 transfers population consists of the remaining investors i.e. males aged under 50 and females aged under 45 at time of advice.