Concerns over IFA shortages after LEBC leaves DB transfer market

Kay Ingram, director of public policy at LEBC, said the firm has voluntarily relinquished its permissions to advise on DB transfers and the transfer or conversion of safeguarded rights within a pension scheme. She added that this was effective from September 2 2019. 

The Financial Conduct Authority has been cracking down on DB transfer advice. In June, it said it was disappointed to see that transfers are still being recommended at high levels, and it announced further scrutiny of firms. 

While the FCA’s intention may be to protect consumers, the risk is that people for whom a transfer might be in their best interests will simply be unable to speak to an adviser to facilitate that transfer

Tom Selby, AJ Bell

A month later, the watchdog defended its increase to the compensation limit the Financial Ombudsman Service can award. The limit’s rise to £350,000 from £150,000 has meant IFAs can find it more difficult to find appropriate insurance.

Experts fear for availability of advice

While stricter regulations are designed to protect consumers, some commentators have warned that they will lead to a shrinking marketplace – making it more difficult for trustees to find suitable advice for their members. 

LEBC’s departure, as one of the larger players in the market, will create further uncertainty, experts have said.

Ryan Markham, head of member options at consultancy Hymans Robertson, said: “The FCA has clearly shown that the DB transfer market will have its full attention as it enforces tighter regulations, across players of all sizes in the industry.” 

He added that this combination of tighter regulations and a stronger regulator could lead to further exits from the market.

Paternalistic employers frustrated

An increasing number of employers concerned with the quality of individually sourced advice have decided to do their own due diligence and give members access to an employer-hired IFA.

Last year, for example, Luxfer Group launched an exercise offering deferred members of its DB fund the opportunity to discuss their benefit options with an IFA.

“There is already a shortage of quality advice and schemes may now have to scramble for resources to fill the gap left by exiting firms,” Mr Markham said. 

Mr Markham said the FCA is rightly concerned about the volume of members leaving DB, but added it is clear that demand for pension freedoms is still high. 

“It’s crucial that the industry takes care not to further widen the advice gap that already exists, which would ultimately put member outcomes at risk,” he said.

Solutions tricky to find

“The FCA is in a bit of a pickle,” noted Nathan Long, senior analyst at Hargreaves Lansdown.

“DB transfers make sense only in around one in 20 cases, so making the advisory hurdle nice and high to keep out any rogues is understandable,” he said. 

“The flip side is that access to advice continues to be limited, as some advisers simply refuse to deal with this type of work due to a combination of complexity and future regulatory risk,” Mr Long added. 

He said only time will tell whether the FCA has got the balance right. In the meantime, trustees should remind themselves that “despite pension freedom, these transfers really are very niche”.

Tom Selby, senior analyst at AJ Bell, said: “It was inevitable as the FCA tightened its stranglehold on this market that the number of advisers able and willing to work on DB transfers would fall.” 

TheFCA’s data shows that between April 2015 and September 2018, 234,951 DB members received transfer advice. Of those receiving advice, 69 per cent were recommended to transfer out, and 31 per cent were recommended not to transfer.

Depending on the outcome of adviser assessments this year, the regulator will look at extending its assessments to take in a broader range of firms in 2020. 

It is also planning a number of events next year designed to improve standards in the industry.

“While the FCA’s intention may be to protect consumers, the risk is that people for whom a transfer might be in their best interests will simply be unable to speak to an adviser to facilitate that transfer,” Mr Selby added.