FCA and the Regulatory Requirements Flashcards
FCA Policy Statement 18/6
- Personal Recommendation
- Determining Suitability
- Appropriate Pension Transfer Analysis (APTA)
- Transfer Value Comparator (TVC)
- Other software tools
- Role of the PTS
Personal Recommendation
A recommendation that is advice on conversion or transfer of pension benefits and is presented as suitable for the person to whom it is made, or is based on consideration of the circumstances of that person
Determining Suitability
- Starting point is transfer will be unsuitable
- Advisors should take account of the clients:
- Intentions for accessing pension benefits
- Attitude to transfer risks (understanding the risk of giving up safeguarded benefits)
- Attitude to Investment Risk
- Realistic income needs including how they can be achieved , the role played by safeguarded benefits in achieving them and the impact on those needs in a transfer , including any trade offs
- Alternative ways of achieving their objectives (other than the transfer of benefits)
Appropriate Pension Transfer Advice (APTA)
- Must be carried out before a personal recommendation is made
- Can incorporate both behavioural and non-financial analysis
- Can still include critical yield if the firm thinks it appropriate
- Includes new requirements :
1) The impact on the clients tax position and access to state benefits
2) A reasonable period beyond average life expectancy (1 in 10 chance of reaching 100%) so 90% will be fine
3) Trade offs in a broader sense (i.e. Whole of Life to provide legacy )
TVC Calculation Process
Step 1
Revalue pension benefits at date of leaving, to scheme pension age of ceding scheme
Step 2
Calculate the capital cost of purchasing an annuity based on scheme benefits
Step 3
Discount the capital cost back to the date of calculation using gilt returns (20 year Gilt projection)
Step 4
Calculate the difference between the discounted value and the CETV being offered
USES FCA ASSUMPTIONS
CETV USES TRUSTEE ASSUMPTIONS
Role of the Pension Transfer Specialist (PTS)
From 1 April 2018 a PTS must :
- check the entirety and completeness of advice.
- Confirm that any personal recommendation is suitable for the client (based on the rules obtained in COBS 9.2.1R to 9.2.3R around assessing suitability)
- Confirm in writing that they agree with the proposed advice before it is provided to the client, including any personal recommendation
Information Communicated to an Insistent Client
1) The firm has not recommended the transaction and it is not in accordance with the firms personal
2) The reasons why the transaction will not be in accordance with the firms personal recommendation
3) The risk of the transaction proceed by the insistent client
4) The reasons why the firm did not recommend that transaction to the client
2 Advisor Model
FCA expects both parties to work together:
- collect all information required to provide the pension transfer advice and the associated investment advice
- undertake risk profiling that asses the clients attitude to transfer risk AND investment risk
- recognise that the investment advice should consider the impact of the loss of any safeguarded benefits on the clients ability to take on investment risk
Advising a Self Advisor
FCA expects firms to -
- require the client to provide all information about the proposed scheme and the underlying investments
- take full account of this information in the advice they provide
- where the advice is unsuitable specifically because of the proposed destination , the adviser should explain that the transfer may be suitable if the client selects a different destination for the funds
Triage Services
The purpose of ‘triage’ is to give the customer sufficient information about safeguarded benefits and flexible benefits to enable them to make a decision about whether to take advice on conversion or transfer of pension benefits
Attitude to Transfer Risk
The FCA require the following factors to be taken into account -
- The risks and benefits of remaining in ceding scheme
- The risks and benefits of transferring into an arrangement with flexible benefits
- The clients attitude to certainty of income in retirement
- Whether the client would like to access benefits on an ad-hoc basis
- The likely impact on the sustainability go the funds over time
- The clients attitude to and experience of managing investments or paying for advice on investments for as long as the funds last
- The clients attitude to any restrictions on their ability to access funds in the ceding arrangement
Suitability Reports
Report is required whether or not the advice is to transfer
Where the advice is not to transfer, the suitability report needs only to show the information that is needed to allow a personal recommendation to be made
FCA Requirements for APTA - Never been tested
Use rates of return which reflect the investment potential of the destination assets
Use the assumption set out in COBS to illustrate the likely income from the ceding scheme at the point of retirement
Take into account the impact of the proposed transfer on the tax position of the client; particularly where a tax threshold would be crossed / entering a new tax band
Take into account the impact of on the clients access to State Benefits
Have regard to the likely pattern of benefits that might be taken from both the ceding scheme and the proposed arrangement
Undertake any comparison of benefits and options consistently
Plan for a reasonable period beyond average life expectancy particularly where this longer period better demonstrates fund exhaustion
Consider and compare how each of the arrangements would play a role in meeting clients income needs throughout retirement
Consider how each of the arrangements would play a role in the provision of death benefits. Include comparisons on a fair and consistent basis both now and at various points in the future)
Consider trade offs that may occur by prioritising different client objectives
Use more cautious assumptions where appropriate
Take into account all charges that may be incurred as a result of transferring / conversion including advisor charges that may occur whether transfer/conversion actually happens
A Transfer Value Comparator (TVC) must be included
Advice Process
Establish Client Relationship - the responsibility of all partied
Gathering Client data and objectives - Hard Facts v Soft Facts
Analysing and evaluating client objectives
Develop and Present recommendations
Implement the financial plan recommendations
Monitor and Review
Areas to probe suggested by regulator
Security of Pension Funds
% of benefits that scheme represents
Cash sums at retirement
Early Retirement considerations
Death Benefits
Spouses / Dependant pension
Risk (both transferring and investment) V Reward
