Pension scam risks prompt new transfer warnings from FCA

Although both alerts merely clarify existing rules rather than introducing any new ones, they "put down a marker for authorised firms, who will need to be extra vigilant in the way they go about advising on pension transfers and carrying out due diligence on investments", according to pensions expert Ben Fairhead of Pinsent Masons, the law firm behind Out-Law.com.

The alerts "also hint at the increasing sophistication of pension scammers", Fairhead said.

"This has been a developing problem where the line between a high risk investment and a fraudulent one becomes greyer and greyer – that, in turn, raises the stakes for those faced with advising in this area," he said.

"Ultimately, compliance with guidance like this, even if individuals disregard advice, is the safest way of guarding against risk of comeback, whether through regulatory sanction or action from those who lose out to poor investments or fraud," he said.

The FCA is concerned that firms have been advising on pension transfers while considering only the receiving scheme and not the assets into which their client's funds will be invested. This left consumers at risk of transferring into unsuitable products, or even being scammed, it said in a note to advisers.

Firms are required by FCA rules to prepare and provide a transfer analysis, which must include a comparison between what the consumer could reasonably expect to receive from their existing scheme and the scheme into which they propose to transfer their benefits. This comparison should explain the rates of return that would have to be achieved in order to replicate the benefits the consumer is giving up, and the likely expected rate of return from the new scheme.

The FCA's alert explicitly warns against the use of "generic" assumptions for hypothetical receiving schemes. Firms that do this "are unlikely to meet our expectations", it said. It is particularly concerned that some schemes have been recommending pension transfers "based solely on whether or not the critical yield is below a certain rate set by the firm for assessing transfers generally", it said. The 'critical yield' refers to the rate of return that the receiving scheme would have to deliver in order to replicate the benefits of the originating scheme.

The alert also reiterates what the FCA requires of firms when dealing with so-called 'insistent clients', who choose to proceed with a transfer despite the advice that they receive; and with transfers to overseas schemes.

In a separate alert, the FCA warned that pension scams were becoming increasingly "sophisticated", with scammers developing new products specially designed to pass the due diligence performed by originating schemes. Firms must ensure that they are "aware of the current threats", and review the effectiveness of their systems and controls, the FCA said.

New "generations" of scams have been evolving in a way that "obscure[s] the nature of the ultimate underlying investment", the FCA said. In some cases, consumers may not realise that they have been investing in unregulated assets because these are held in a special purpose vehicle (SPV) or as part of an investment portfolio overseen by a third-party discretionary fund manager, it said.

The alert goes on to set out some factors that providers should be aware of to help them recognise non-standard assets.