At the end of August, the FCA issued guidance to firms on how to support potentially vulnerable consumers looking to transfer their defined benefit pension and conducted a review of firms' practices to identify examples of good and bad practice.
As with all recent guidance on pension transfers, the spectre of the British Steel Pension Scheme ("BSPS") saga is to be found lurking between the lines and, as a recent decision notice shows, enforcement action against bad actors is still very much on the FCA's agenda.
At the end of September the FCA imposed a disciplinary sanction and a prohibition order on Darren Reynolds, a former director of Active Wealth (UK) Limited, for his role in providing unsuitable pension transfer advice to BSPS members. The FCA's investigation found that Active Wealth had relied on template wording in its reports, which did not take into account the individual circumstances of its clients. Mr. Reynolds had considered that the reliance on these documents and their format was appropriate, but the FCA found that this was not sufficient to ensure that the advice given was suitable. Because of Mr. Reynolds' actions, many individuals who received the advice suffered significant financial losses. As of June 2023 the Financial Services Compensation Scheme (FSCS) has paid compensation of over £19.8 million to Active Wealth’s former customers. The FCA found that the advice given by Active Wealth was unsuitable for the majority of its clients, and that the firm had failed to provide adequate information about the risks involved in transferring their pensions. Many individuals were advised to transfer their pensions into high-risk investments, which were not suitable for their needs and circumstances.
Whilst the Active Wealth case is an extreme example, firms must still be mindful of their systems and controls and be comfortable that they encourage advisers to act correctly (and prevent those who might not want to). Since the publication of "FG21/1 Guidance for firms on the fair treatment of vulnerable customers" back in February 2021, the FCA has made it very clear that they expect firms to take a proactive approach to identifying and supporting consumers who may be vulnerable when seeking advice on pension transfers. Other regulatory initiatives, such as the very well-publicised Consumer Duty, have raised the bar in terms of expectations around communicating with consumers and working towards delivering positive outcomes and the new guidance further reinforces this position.
The FCA expects firms to be creating an environment where consumers feel comfortable disclosing their needs and where required, will receive suitable support. Firms should be aware of the potential indicators of vulnerability, such as age, health, financial literacy, and life events, and should take steps to identify consumers who may be vulnerable or at a vulnerable point of their life. Consequently, staff should be adequately trained to identify and respond to vulnerable consumers. Firms must provide clear and accessible information, and offer alternative communication channels when issues are identified or difficulties arise. There is also the expectation that Firms should provide ongoing support to consumers `who have transferred their pensions, including regular reviews and updates on the performance of their investments.
The FCA review identified several examples of good practice in firms' approaches to supporting consumers seeking to transfer their pension. These include:
- Factfind checks for vulnerable characteristics: One firm's initial factfind document included a checklist of the four signs of vulnerability (health, life events, resilience, and capability) with examples of each. Advisers carrying out the fact-finding confirmed whether their customers had any of the signs and recorded a summary next to each and a rationale as to why the customer did or did not have characteristics of vulnerability; and
- Horizon scanning for vulnerable clients: One firm proactively identified schemes where redundancy announcements had been made. It informed all its advisers that it should presume any consumer in those schemes had characteristics of vulnerability unless their initial assessment suggested differently.
The FCA review also identified examples of bad practice in firms' approaches to supporting consumers. These include:
- Failing to identify vulnerable consumers: Some firms did not have adequate processes in place to identify consumers who may be vulnerable, such as those experiencing life events or cognitive decline. This meant that vulnerable consumers may not have received the support they needed to make informed decisions about their pensions;
- Failing to provide clear and accessible information: Some firms provided information that was overly complex or difficult to understand, which may have made it harder for consumers to make informed decisions about their pensions;
- Failing to conduct thorough fact-finding and risk assessments: Some firms did not conduct thorough fact-finding and risk assessments, which meant that consumers may have received unsuitable advice or been exposed to unnecessary risks; and
- Failing to provide ongoing support: Some firms did not provide ongoing support to consumers who had transferred their pensions, which meant that consumers may not have received updates on the performance of their investments or been given the opportunity to review their decisions.
The examples of good and bad practice identified in the FCA's review provide valuable insights into how firms can improve their practices and ensure that consumers receive suitable advice and support. By following the FCA's guidance and adopting examples of good practice, firms can help to ensure that consumers are able to make informed decisions about their pensions and are protected from scams and fraud.
For information on how DWF can help you ensure your systems and controls around Pension Transfer advice and vulnerable clients meet the FCA's expectations, please get in touch.
