What types of pension switching should firms focus on?

Our project focused on advised switches into personal pension plans (PPPs) and self invested personal pensions (SIPPs), so this would not be an unreasonable place for firms to focus their work.

However, the unsuitable outcomes we identified apply to all forms of regulated pension switching (although other issues also apply for switches out of defined benefit occupational schemes and switches for immediate decumulation). Firms should therefore consider how these risks apply to their specific circumstances and target their follow-up work accordingly. Factors that might influence this decision include the volume and product-type of pension business written, and the specific systems and controls in place in this area.

Where a firm decides, on a risk-basis, to limit the target of its initial work to switches into particular products, we expect them to use these results to determine whether the scope should be extended. Further work and remedial action should then be taken as necessary.

What time period should firms focus on?

There are no set dates for the period this work covers. Our thematic project focused on pension switches following A-Day (April 2006). As a result, the period from A-day onwards would not be an unreasonable place for firms to start.

However, in deciding on the time period to cover, firms will need to consider the sales processes and systems and controls they had in place, and whether these have changed over time. For example, where a firm has made substantive changes to its advice processes and systems and controls it will need to consider whether it gave suitable advice both before and after these changes were made.

Where firms focus on a specific time period and identify problems we would then expect them to widen the review period to determine the full extent of the issues.

Do all firms need to review files?

No. We are not requiring every firm to undertake a review of past sales. The Dear Proprietor/Dear Compliance Officer letters made it clear that firms need to assess whether they have given suitable advice in line with our rules and guidance. As part of this assessment we expect that firms will need to consider the sales processes and systems and controls they had in place and, if necessary, look at a sample of past sales. Where firms have concerns about the approach they took on past sales, reviewing a sample of files can help them determine whether the approach they took resulted in unsuitable advice.

What does the FSA expect in terms of sample size and methodology?

Where a firm decides to review files, the approach it takes should reflect the specific circumstances of its individual business. Firms should consider the resources we have provided in this area including the published report on the findings from the project (with details of the main unsuitable outcomes identified and examples of good and poor practice); the approach we used to assess the suitability of advice (in the annex of the letters we sent to firm); and pension switching advice suitability assessment template. We will be using this template as the basis for our follow-up assessments beginning Q3 2009.

Firms may want to consider whether the basis on which they’re conducting their review is reasonable and whether they can use the results to satisfy themselves and us that they have given suitable advice in line with our rules and guidance and treated their customers fairly.

Where a review identifies concerns with the suitability of the advice we expect firms to take action to remedy the situation for the customer, including offering redress where appropriate. If a review identifies a wider risk of unsuitable advice, we expect firms to take further action to determine the extent of the risk and then take remedial action as necessary.

What evidence is the FSA expecting to see to demonstrate a file has been reviewed or a process assessed?

In the Dear Proprietor/Dear Compliance Office letters we sent firms we made it clear that we would be conducting follow-up work in this area beginning in the third quarter of 2009. Firms that had not undertaken appropriate action in response could be subject to regulatory action. Firms should retain appropriate records of the work they have undertaken so that they can demonstrate to us that they looked at this issue and have taken appropriate action as necessary (SYSC 3.2.21).

Can firms contact customers as part of file reviews?

We accept that as part of a file review it may be necessary to contact customers to gather further information or provide them with further information on the sale. Where customer contact is required firms should make sure they:

1. avoid any elements that suggest the communication is a circular or a sales initiative;
2. avoid any elements misrepresent the context of the contact (generally, this will mean that the communication is put in the context of the FSA action that prompted it so that customers understand why they are being contacted); and
3. clearly explain to each customer the specific issues giving rise to the contact exercise, the importance of their response and what action is needed to respond.

What constitutes an unsuitable file?

We have provided firms with material that sets out the findings from our project and our expectations in this area. This includes:

1. the key findings from the project, including examples of good and poor practice;
2. the Dear Proprietor/Dear Compliance Officer letters sent to firms; and
3. the pension switching advice suitability assessment template.

Firms should read and consider this material alongside existing relevant Handbook rules and guidance.

Where a review identifies concerns with the suitability of the advice we expect firms to take action to remedy the situation for the customer, including offering redress where appropriate. If a review identifies a wider risk of unsuitable advice, we expect firms to then take further action to determine the extent of the risk and then take remedial action as necessary.

What action should a firm take if its review identifies unsuitable files?

There is no prescribed method for how firms structure and conduct their reviews. The approach each firm takes should reflect the specific circumstances of their individual business. The aim of a review is to determine whether unsuitable advice has been given to customers and for firms to take any remedial action necessary, in terms of both past sales and their approach to future sales.

If the results are inconclusive, firms need to consider whether the initial scope of the review is appropriate and whether changes to the scope will allow them to reassess the risk of unsuitable advice.

Where a review identifies concerns with the suitability of the advice we expect firms to take action to remedy the situation for the customer, including offering redress where appropriate. If a review identifies a wider risk of unsuitable advice, we expect firms to then take further action to determine the extent of the risk and then take remedial action as necessary.

What redress is a firm expected to provide?

We do not mandate the method that firms should use to calculate redress and firms will need to calculate this on a case-by-case basis. However, as a high-level principle, we would expect that consumers should be put back in the position they would have been in if  they had been offered suitable advice.

When does the FSA expect this work to have been completed by?

There is no fixed date by which firms must complete this work as the extent of it will vary, depending on the specific circumstances of their business. However, as our project highlighted a potential risk of unsuitable advice we would expect firms to take swift action to ensure their customers are treated fairly.

We have made clear that we will be conducting follow-up assessments focusing on this area starting in the third quarter of 2009 to check whether firms have taken appropriate action. If firms have not completed this work by then they will need to justify this to us.

Do firms need to inform their PI insurers of any work they are undertaking?

This will depend on the terms and conditions of your PI insurance policy.

Should I update the FSA on the progress of my firm's past review?

Principle 11 requires a firm to deal with its regulators in an open and cooperative way and to disclose appropriately anything relating to the firm that we would reasonably expect to be told.

Firms are required to notify us of any significant failure of systems or controls or significant breach of a rule. So if a firm has conducted initial sampling or a review of internal procedures and significant levels of unsuitable advice or failings have been identified, they should notify us immediately.

Significance should be determined by the potential financial loss to customers or to the firm, frequency of the breach, implications for the firm's systems and controls and if there were delays in identifying or rectifying the breach.

Notification may be given orally or in writing (although we may request written confirmation). However, a firm should provide a written notification if a matter either is complex or may make it necessary for us to take action. The notification should provide details of the circumstances, including identifying the rule or requirement, and information about any steps the firm has taken or intends to take to rectify or remedy the breach and prevent any future potential occurrence.

Firms are referred to the provisions relating to notifications in SUP for further information and guidance.