UK: Pension Scheme Transfers – More Woe For Advisers?

Rules introduced in April 2015 have seen increasing numbers of 'insistent clients' who want to transfer their pensions regardless of advice to the contrary.

From April 6, 2015, individuals in the UK who wish to transfer pensions valued at GBP 30,000 (USD 46,374) or more from a defined benefit (DB) occupational pension scheme to a money purchase scheme are required to obtain advice from an adviser authorised by the Financial Conduct Authority (FCA).

Trustees of DB schemes must check whether members have obtained advice before proceeding with the transfer, although trustees will not need to verify the substance of the advice.

The FCA starting point is a presumption a transfer from a DB scheme will not be in the member's interests and accordingly it will generally be difficult for an independent financial adviser (IFA) to advise in favour of a transfer.

However, with the new pension freedoms introduced from April 2015, there is anecdotal evidence of increasing numbers of "insistent clients" who want to transfer regardless of advice to the contrary; possibly blinded by the short-term benefits of the transfer and not appreciating the true, longer-term value of the DB pension.

At the end of March 2015, the Personal Finance Society warned its members not to process transfers for "insistent clients" acting against professional advice unless and until the FCA had confirmed neither the members nor the Financial Services Compensation Scheme would be liable if such clients later lost out because of the transfer and brought claims against the members to recover that loss.

Transfer values from DB schemes clearly concern the FCA. In July 2014, for example, the FCA found a large number of suitability failings during a review into enhanced transfer value exercises – 59% of those transfers had involved insistent clients. The FCA confirmed it would work with the advisers to rectify any unfair outcomes, but has since ordered eight firms to carry out skilled persons reports into their regulated advice procedures.

The FCA has issued a factsheet, reflecting latest FCA policy, confirming IFAs can transact business against advice if the client insists, but the IFA should be clear about the risks and that he/she is acting against advice. The FCA has shied away from specific disclaimer forms, but best practice would be for the client to explain in his/her own words why they are insistent the relevant transfer take place.

The continuing trend in claims against IFAs relating to transfers is having a further effect, as it is reported just one in four financial advisers is now willing to work on pension transfers. In part this is driven by professional indemnity insurers in the sector becoming more selective as to whom they will cover.

There is a risk the new pensions freedoms could quickly become blighted by stories of financial loss – even if not the fault of the advisers – and advisers themselves face difficult decisions as to how to deal with clients wanting to go against their advice.

We will have to see whether the factsheet – and the clear audit trail it is recommending – will be adequate to defend claims arising out of insistent clients who regret the loss of what they have voluntarily given up. If not, then we may see the introduction of rule changes such as extended cooling-off periods; and/or confirmation to the member from a second adviser the transfer is being made contrary to advice.

While the court seemed to approach its decision from a case management perspective, it is not clear from the judgment if the order was made pursuant to CPR 18. In any event, in reaching his decision, the judge saw no prejudice to the defendant in disclosing the details sought.

The reality of the situation was recognised by the court; payment would be made by the defendant's insurers and if the insurance details were not disclosed, problems would be encountered at trial.

In this instance, affordability was prioritised over the commercial sensitivity of the defendant's insurance details. However, the "case-by-case" approach adopted by the courts leaves those subject to future applications for disclosure of their insurance details with a frustrating lack of certainty.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.