We have now completed our follow-up work on the quality of pension switching advice and published a report providing an update on the action we have taken and the outcomes.
Following pensions 'A-day' there was a substantial increase in pension business (for both Personal Pension Plans (PPPs) and Self Invested Personal Pension Plans (SIPPs)), particularly replacement business (pension switching).
Our work in this area commenced in 2008 and was undertaken because we were concerned that there was an increased risk of customers receiving unsuitable advice. We undertook a thematic review of the quality of pension switching advice.
In December 2008 we published the findings from this review.
We visited 30 firms giving advice and assessed 500 files. Unsuitable advice was found in 16% of cases reviewed; however, this was unevenly spread across the firms reviewed. We were concerned that 25% of the firms in our sample provided unsuitable advice in 33% or more of cases sampled.
In view of the findings of the thematic review, we committed to a programme of further pre-emptive action to prevent customers' losses accumulating in the period up to their retirement.
There are over 4,500 firms in the pension switching advice market - including many firms carrying out relatively small volumes of business. Our follow-up work took this into account by using appropriate tools to achieve the maximum possible coverage of the firm population:
Dear Compliance Officer/Proprietor letter
In December 2008, we wrote to the 4,500+ firms responsible for the majority of pension switching advice. In this letter we set out the findings of our review and requested firms to consider whether they needed to take action regarding their past and future sales.
Publication of our suitability assessment template
We published our pension switching advice suitability assessment template and accompanying guidance. The template sets out the approach we use to assess pension switching advice and provides firms with a resource to assist them in this area.
Small firms' roadshows
In early 2009, we hosted 18 regional roadshows on pension switching advice. We asked the 1,500 small firms conducting the highest volumes of pension switching business to attend. The objective of the roadshows was to reiterate the main findings from the review and provide further guidance and technical support to help firms deliver suitable pension switching advice.
Consumer information
In addition, there is information on the Money Advice Service website to assist consumers who may be considering switching their pension in future or are concerned about pensions switching advice that they have already received.
In 2009, we undertook a programme of desk-based reviews and in some cases, visits, involving 22 firms. This work focused on firms considered to pose a higher risk of poor advice and involved 12 smaller firms and ten relationship-managed firms (including two major banks).
Unsuitable advice was found in 34% of the files reviewed. The overall level of unsuitable advice was higher than was found in our original thematic review (16%). However, this assessment specifically targeted higher risk firms and the results are broadly consistent with the worst performing firms from our original sample.
Unfortunately, these results indicate the worst performing firms have taken no or little remedial action in response to the findings of our original review and subsequent mitigation work. We have therefore taken appropriate action to ensure these firms treat their customers fairly:
- RSM Tenon Financial Services Ltd has been fined £700,000 and is now undertaking a past business review.
- Ten other firms are also being required to conduct past business reviews, of which four are being carried out by skilled persons. A further eleven firms have been told they must review those files assessed as unsuitable or unclear and pay redress as appropriate. Those firms will also be required to assess the wider implications of our findings for the rest of their business, which in due course could lead to further past business reviews.
This work has driven significant change within the industry. We are pleased to see many firms reviewing both their past sales and their processes and procedures to deliver improved outcomes for consumers. We are particularly encouraged that a number of firms have proactively committed to substantial past business reviews, which will deliver very large amounts of redress for consumers.
As a result of our work to date, over 10% of the total pension switching advice cases written since A-day will be reviewed. We believe this will deliver redress in the region of £150m for consumers. However, as we are currently in discussions with a number of firms on the format of further remedial work these figures are likely to increase.
The majority of relationship-managed firms have confirmed that they have amended their pension switching advice processes and significant numbers of smaller firms have also confirmed their commitment to improving their practices.
There remains, however, room for improvement in the quality of pension switching advice overall. Our initial phase of work identified a segment of poor performing firms and our follow-up work targeted a further sample of firms considered to pose a higher risk of providing unsuitable advice. Disappointingly, in these firms we continued to find high levels of unsuitable advice and little indication that these firms had embraced the need for change.
The failings we saw in our follow-up review were generally consistent with those found in our original work. The main reasons for unsuitability being:
- the switch involved extra product costs without good reason;
- the fund(s) recommended were not suitable for the customer's attitude to risk;
- the adviser failed to explain the need for, or put in place, ongoing reviews when they are necessary; and
- the switch involved loss of benefits from the ceding scheme without good reason.
Our follow-up work identified two additional concerns:
- firms operating tied advice models that prevent their advisers considering a customer's existing pension arrangements when giving pension switching advice; we consider this to be a breach of our rules; and
- advisers recommending portfolio advice services with insufficient justification that the additional costs genuinely added value for customers.
We are committed to improving outcomes for consumers and will continue to focus on firms who have not demonstrated improvements. We have already taken disciplinary action against one firm and the director of another for poor conduct relating to pensions switching advice. Four further firms are currently under enforcement investigation and 25 further firms are undertaking past business reviews.
Through intensive supervision, we will continue to:
- focus on firms that pose the highest risk of providing poor advice by reviewing both pension switching and other investment advice (past and ongoing) - we will test suitability as part of ARROW assessments, where appropriate, and through our small firms' supervision programme; and
- carry out further supervisory work on wider advice issues, including those arising in the lead up to implementation of the Retail Distribution Review.
We will use our full range of regulatory tools with firms who do not meet the required standards. We have clearly outlined our expectations and ignorance is not a defence - failure to take this issue seriously will raise significant questions about the fitness and propriety of firms and their senior management and we will take tough action as appropriate.
Press release (April 2010)
Report (April 2010): Quality of advice on pension switching: an update
Press release (December 2008): FSA takes action to address pension transfer advice failings
Report (December 2008): Quality of advice on pension switching - A report on the findings of a thematic review
Dear Compliance Officer/Proprietor letter: Pension switching advice - important information from the FSA
PS10/6: Distribution of retail investments - Delivering the RDR
Information for smaller firms: quality of advice on pension switching
Information for smaller firms: one-minute guide - pension switching
Information for smaller firms: pension switching FAQs
This template sets out the approach we use to assess pension switching advice and provides firms with a resource to assist them in this area.
In order to use the template you will need to save it to a local file and rename it. When the dialogue box opens asking you whether you want to open or save it please open the file then save to a local file as a renamed file.
You will then be able to use it to record your information.
This template applies only to advice on switches from all types of money purchase pensions, including personal and occupational pensions, to a Personal Pension Plan (PPP) or Self-invested Personal Pension (SIPP). It does not cover the requirements for transfers from defined benefit occupational schemes or switches to use drawdown flexibility immediately.
Note that this suitability assessment template relates only to whether the advice is suitable; hence it should only form a part of an overall file review process. It should not replace in full any existing file review checks firms have in place and other issues such as disclosure, needs analysis, money laundering etc should also be checked.
