FCA has imposed a substantial penalty on an adviser in respect of poor DB pensions transfer advice.

In its recent 2021-22 Business Plan, the FCA emphasised again that defined benefit pension transfer advice remains on its radar, noting that it would "take assertive enforcement action where there is serious misconduct".  

Consistent with that message, on 9 August 2021, the FCA published a Decision Notice it issued to a former pensions adviser at a small adviser firm (now in liquidation).  The FCA decided to impose a very substantial penalty on the adviser personally, in the amount of £1,284,523 (comprising disgorgement of benefits worth £816,784, plus interest on them of £181,839, plus a financial penalty of £285,900).  The FCA also prohibited the adviser from performing any senior management function in financial services, and from advising consumers on pension transfers and pension opt outs.

Importantly, at the time of writing this article, the adviser had challenged the FCA's Decision Notice by referring it to the Upper Tribunal.  Accordingly, the FCA's decision is provisional, yet to take effect, and the subject of ongoing litigation, particularly with respect to the sanctions the FCA has sought to impose.  The FCA's decision has nevertheless been widely reported and (whatever its outcome) is clearly of interest to the wider market.

Summary of the matter

The FCA had authorised the small firm in issue to advise on pension transfers and pension opt outs, and to arrange (bring about) deals in investments.  The adviser in issue was its sole director, the sole person approved to perform the firm's core regulated functions, and its only pension transfer specialist.

In its Decision Notice, the FCA found there had been substantial failings in pension transfer and opt-out advice given to the firm's customers between 8 June 2015 and 13 December 2017.  This was before the extension of the FCA's Senior Managers and Certification regime (SMCR) to firms of this type, so technically the FCA decided the matter by reference to the older Approved Persons regime rather than the SMCR.  The decision is nevertheless relevant to understanding the duties imposed by the SMCR, given some similarities with the older regime.

The FCA decided that during the relevant period the adviser had not complied with:

• FCA Statement of Principle 2, by failing to act with due skill, care and diligence when advising 422 customers on the transfer of their defined benefit pensions into alternative pension arrangements (183 of whom were members of the British Steel Pension Scheme, which underwent a period of restructuring in 2017).  Overall, the total value of transfers advised during the relevant period amount to some £125m, of which £74m related to the British Steel Pension Scheme; and
• FCA Statement of Principle 7, by failing to take reasonable steps to ensure that his firm complied with certain of its obligations under the regulatory system.  The FCA found in particular that the firm had not complied with FCA Principle 6 (the requirement to pay due regard to the interests of customers and treat them fairly), FCA Principle 9 (the requirement to take reasonable care to ensure the suitability of advice) and a series of COBS rules relevant to pension transfer advice.

The FCA's findings regarding the advice

The FCA made detailed findings, both about the firm's general compliance arrangements and about the advice process the adviser had used.  The FCA concluded that, during the relevant period, there had been a series of failings.  In summary, these included:

• a failure adequately to document the pension transfer advice process;
• a failure to procure any independent review of the business or of pension transfer customer files for assurance that they were compliant;
• the use of a flawed advice process leading to unsuitable advice being given;
• advice being given on the basis of a 'flawed premise'.  The FCA maintained a position it has taken elsewhere, that "when a firm is advising customers on whether to transfer out of a defined benefit pension scheme, the firm should start from a position that a transfer will not be in the best interests for the majority of customers".  It found the adviser had placed excessive reliance on customers' stated wishes to transfer their pension, to conclude that transfers were in their best interests and therefore suitable;
• failures to obtain sufficient information from customers to identify whether pension transfers were suitable, for example information about customers' financial situations, the extent of their reliance on defined benefit pension schemes to meet income needs through retirement, and customers' individual objectives.  (FCA noted in particular the use of generic objectives across customer files);
• failures to analyse the realism and achievability of customers' objectives before giving advice, for example by testing them through cash flow modelling;
• failures to take into account some of the information that the adviser did actually gather;
• failures to understand (for example by independent research) features of the pension schemes from which the transfers were being made, those schemes' benefits and options available to scheme members instead of transfers out;
• failures to conduct proper transfer analysis, particularly proper comparisons between a customer's existing pension benefits and alternatives following proposed transfers; and
• advice about the consequences of transferring out of the scheme only being given to the customer after the transfer had taken place.

The FCA found the firm had received approximately £2.2m in fees for all defined benefit pension transfer advice, of which approximately £1.2m had been retained by the firm and the adviser.

The FCA's expressed its findings in trenchant terms.  It found (amongst other matters) that the seriousness of the misconduct demonstrated "a serious lack of competence and capability" (para 2.21).

Why the FCA's approach is significant

This is not the first FCA enforcement decision to have considered the suitability of defined benefit pension transfer advice, or the fair treatment of pension customers.  However, seen from a litigation and enforcement perspective, we believe it is significant for a number of reasons.  In particular:

• the extent of the FCA's findings and level of detail.  The FCA reviewed and took issue with the adviser's sales process from end to end.  In March 2021, the FCA published its finalised guidance FG21/3 'Advising on pension transfers', which now specifically sets out examples of good and poor practice in this area.  The conduct in this case pre-dates that finalised guidance by some years, however it is clear that a series of the issues which FCA highlighted in FG21/3 were also material issues in this case.  Taken together, the FCA is in our view sending some clear messaging to the market about its expectations;
• the size of the proposed penalty.  Although this matter is still subject to litigation, and the Upper Tribunal could require the FCA to take a different approach to financial penalty, if the penalty that the FCA has sought to impose were to stand, it would be one of the largest it has imposed on an individual.  This is consistent with other recent senior level messaging from the FCA that the organisation is adopting a more robust approach and willing to test the extent of its powers through litigation if necessary.  Of particular interest is the FCA's approach to disgorgement, the largest element of the penalty.  Here, it is in effect seeking to deprive the adviser of the benefit of sums paid out of the firm prior to liquidation, apparently (because of the firm's business model) traceable back to fees the firm made from the pension transfer advice.  Further, the FCA assessed this case as being towards the more serious end of its scale (level 4);
• the FCA's use of a voluntary requirement to control the firm's activity, apparently around the time its investigation began.  The Decision Notice records (para 4.1) that the FCA requested the firm apply for a 'vReq' in December 2017, pursuant to which it was required to cease all regulated activities relating to defined benefit pension transfer business;
• the FCA's use of sample testing as the basis of its enforcement decision.  The FCA did not reach its findings based on a review of all pension transfer advice the firm gave during the relevant period, but instead on a relatively small sample of 30 customer files (of which 13 were members of the British Steel Pension Scheme).  This would appear to have been less than 10% of the firm's pension transfer customers during the period in issue.  The FCA commented however (para 4.14): "Given the pervasive and consistent failings across all the files, the Authority has inferred from the 30 files reviewed that all of the Pension Transfer advice provided by [the adviser] to [the firm's] customers did not comply with the relevant regulatory requirements";
• FCA's references to customer impact and vulnerability.  These factors appears in the FCA's reasoning in a way that seems consistent with other regulatory messaging, particularly around vulnerability; and
• the FCA's approach to 'serious financial hardship'.  This case is somewhat unusual on its facts.  While the FCA's published penalties guidance allows it to take 'serious financial hardship' into account when setting a financial penalty, and the FCA acknowledged the adviser had provided some verifiable evidence of this, it decided not to make an allowance for serious financial hardship in the Decision Notice.  It appears that its reason for doing so is founded on an allegation that the adviser dissipated assets that could have been used to satisfy a larger penalty, by making certain payments to his family members shortly after the FCA informed him it was proposing to impose a financial penalty and its likely amount.  The FCA commented that: "the timing of these payments [to family members], and the absence of full and frank evidence being provided in relation to these payments, leads the Authority to conclude that the payments were  made […] with the intention of frustrating or limiting the impact of the action proposed by the Authority" (para 6.29).  This in particular would appear to be one of the matters that the adviser is challenging before the Upper Tribunal.