The FSA and PIA consult on compliance testing for phase 2 transfer cases

The proposals published today are for an alternative approach to compliance testing - ie for checking whether the investor was properly advised at time of sale. (This follows proposals published in February for simplification of loss calculations.)

In developing an alternative approach to compliance testing, the regulators aim has been to devise a test that is robust and practical, and thereby fair to both investors and reviewing firms.

In brief, the test, which would be called the Optional Compliance Test, seeks to establish two things:

whether the transfer was financially viable at the time of sale;

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.

The design of the Optional Compliance Test is consistent with the standard approach to compliance testing originally published in 1994, but it aims to provide a more structured approach. In particular, materials (a questionnaire and factsheet) are provided to assist firms in gathering information from investors where they cannot obtain all that they require from their own files.

Interested parties are invited to comment on the structure and contents of the proposed alternative compliance test, and on guidance to firms which is published in draft. Responses are requested by 23 April 1999.

Notes for editors

The then SIB announced details of its guidance, designed to establish a framework for reviewing past pension transfer and opt-out business on 25 October 1994. This specified that, in determining whether redress is payable, firms must consider three questions: was the advice given compliant with regulatory rules in force at the time?; if not, has the investor suffered a financial loss (actual or prospective)? if the advice was non-compliant and the investor has suffered a loss, was the non-compliant advice the cause of the loss? The FSA and PIA are consulting on an alternative approach to establishing the answer to the first question - ie to compliance testing. Where this test is failed, reviewing firms need to proceed to loss assessment and (if necessary) to causation testing.

In devising an alternative approach for phase 2 transfers, the FSA and PIA have paid regard to: the need to ensure that the test is consistent with the principles of compliance testing as laid down in the October 1994 guidance, and is therefore robust; the desirability of streamlining and structuring the work that firms need to do, so that the test is seen to be practical. The regulators took as their starting point, an existing alternative compliance test for transfers developed by the PIA in 1995 and called the Optional Streamlined Test (OST). The direct invitation approach to phase 2 and the changed nature of the population of cases now being reviewed (further away from retirement) meant that aspects of this test needed to be reviewed. In addition, reviewing firms have raised a number of issues about the OST which the regulators agreed to examine as a part of this more general consultation exercise. The key change in the new proposals is the creation of a new set of investor materials (letter; factsheet; and questionnaire) which firms using this test, and wishing to demonstrate that a particular sale was compliant, would need to send to the investor concerned to gather information. The number of transfer cases within the phase 2 population is estimated to be 985,000 (as compared with 155,000 in the priority review). The phase 2 transfer population consists of men aged under 50 and women aged under 45 at the time of sale. Representations on CP21 should reach the FSA and PIA by 23 April 1999.