The Financial Conduct Authority (FCA) has now issued guidance to improve the quality of pension transfer advice. The Financial Ombudsman Service (FOS) has also recently written about its rising concern with complaints regarding pension advice, and specifically DB to DC transfers. These documents confirm that we're seeing a large increase in customers and firms becoming more aware of the issue, and it is likely that this will only increase in the near future.
The cap on FOS compensation may increase in April next year, from £150,000 to £350,000. Given the sums at stake, DB mis-selling exposures are one of those risks to which the new FOS limit will clearly be relevant.
As many as two million savers were mistakenly advised to opt out of occupational schemes and take out personal pensions in the late 1980s and early 1990s.
The introduction by the government of the pension freedoms in 2015 echoes the decision taken by the government of the 1980s to encourage individuals to take out personal pensions in a response to the problem of an aging population. Since 2015, there has been an escalation in the demand for pension transfer advice, as well as an increase in the volume of transfers out of DB schemes to DC schemes which will give savers more flexibility over when and how they draw down their pension savings.
The FCA has recognised the potential for significant consumer harm if consumers relinquish valuable benefits as a result of improper pension advice. It has now issued a policy statement containing finalised rules and guidance on improving the quality of pension transfer advice, including a requirement for all pension transfer specialists to hold a specific qualification by October 2020 for providing advice on investments. The guidance also proposes that advisers consider their client's attitude to, and understanding of, the risks of giving up safeguarded benefits for flexible benefits. The FCA has also sought views on whether to intervene in charging structures, which may include a ban on contingent charging.
So how significant is the potential problem? Transfer values have been at record levels since 2016. Employee benefit consultancies have reported that the average transfer size is over £250,000, while the FCA has estimated that approximately 100,000 members are transferring out of their DB schemes every year. That's an estimated £20-30bn per annum moving out of DB schemes each year.
The FOS has now revealed that it has received 300 complaints involving DB to DC pension transfers since 2015. Although this only constitutes 2% of complaints, the FOS is evidently still interested - particularly given the sums of money involved in the transfers.
The FCA's recent intervention, in conjunction with the ease with which consumers can access substantial redress through the FOS, indicates that there is the potential for a wave of complaints surrounding pension transfers which may open up advisers to significant compensation liability. This obviously has the potential to create difficulties for advisers, particularly when considering that the FOS does not need to apply legal standards of proof but instead decides a complaint based on what is fair and reasonable in the circumstances.
Jonathan Cavill is a contentious financial regulatory expert at Pinsent Masons, the law firm behind Out-Law.com.