A large-scale mis-selling scandal brewing in the United Kingdom that involves almost 2000 advisers has the potential to affect Australian advisers who assist expats transfer pension funds internationally.
The Financial Conduct Authority (FCA), which regulates the United Kingdom’s finance industry, is coming down on financial planners advising defined benefit (DB) pension scheme recipients to cash in their entitlements. The Financial Times this week revealed the FCA was planning to write to 1,841 advisers about the “potential harm” caused by advice in relation to transfers out of defined benefit schemes.
The concern is that these advisers profited from contingent advice selling, after taking a percentage when a client transfers their entitlement out of a defined benefit scheme and into less desirable market-linked schemes.
The scandal, which made the front page of the London financial papers, involves 76 per cent of the 2,426 firms in the UK that have provided DB advice since 2015.
The FCA surveyed firms that provided DB pension advice between 2015 and 2018 and found that 70 per cent had advised clients to transfer out of the schemes, collectively valued at £80 billion.
The UK regulator has launched a two-year probe into the sector and published a ‘Dear CEO’s’ letter last week highlighting their concerns.
“We have repeatedly made clear our expectations of financial advisers, as well as strengthening the rules around [DB] pension transfer advice. Despite this, too much advice is still not of an acceptable standard,” the letter stated. “We also remain concerned firms are recommending large numbers of consumers transfer out of their DB pension schemes despite our stance that transfers are likely to be unsuitable for most clients.”
The default position for UK advisers must be that DB pensions entitlements should be retained, the letter reiterated.
“We expect you to start from the assumption that a pension transfer is not likely to be suitable for your client,” the FCA stated.
The FCA issued a consultation paper in mid-2019 on various proposals around DB advice, including around the remuneration models planning firms used. A rules and guidance ‘handbook’ is scheduled to be published in Q1, 2020.
The scandal has the potential to touch Australian financial advisers working in transferring pensions from the UK to eligible domestic funds, otherwise known as Qualifying Recognised Overseas Pension Schemes (QROPS).
“It’s certainly relevant,” says Murray Payne from Exfin Wealth in Perth. “If there’s a risk to advisers, it could be from pre-2015 transfers.”
Several regulatory changes were introduced in the UK in 2015; while the “pension freedom” reforms gave people more ability to transfer out of schemes, they were also forced to seek financial advice if the entitlement was worth more than £30,000.
Payne points out several checkpoints that would distance Australian advisers from the scandal, however. For one, planners here are regulated by ASIC and not the FCA. “The Australian adviser is licensed by ASIC and linked to client issues in Australia,” Payne says.
The regulators themselves do have a co-operative global regulatory environment in mind. In April 2019 ASIC and the FCA agreed to strengthen cooperation post-Brexit, with the FCA’s then-chief executive, Andrew Bailey, saying the action would “ensure the FCA and ASIC have uninterrupted exchange of information and can supervise cross-border activity of firms.”
According to Christine Keen, a specialist in QROPS transfers who operates out of Surrey in the UK, the FCA is closing in on major amendments to the framework that allows advisers to profit from the conflicted arrangement.
“They’re looking to ban contingent charging, where the client pays a minimal fee upfront for a report and only if it goes ahead is the remuneration really paid,” she says. “It’s still on the cards.”