FCA's move to shrink IFA market poses trustee challenges

Speaking at the FCA’s annual public meeting on Wednesday, CEO Andrew Bailey said the watchdog was committed to protecting pension savers considering transfers from unscrupulous advisers.

“We have prioritised pension transfer advice, thoroughly examining the activity of firms in this space and engaging with industry to guard against harm to consumers,” he said.

The FCA defended its decision to increase the compensation limit the Financial Ombudsman Service can award – rising to £350,000 from £150,000 on April 1 this year – which has made it more difficult for some independent financial advice companies to find suitable insurance.

The FOS limit increase was unnecessary, and the FCA badly overestimated the number who would benefit. The FCA are simply not giving enough weight to the importance of consumers being able to access affordable transfer advice, and their actions to date have reduced the supply, which cannot be to the benefit of consumers

Sir Steve Webb, Royal London

Megan Butler, the FCA’s executive director of supervision, said: “We were conscious that when we changed [the limit], insurance would come under pressure. We thought that that market on that scale could lose a few [IFAs] without damaging access to good quality advice for consumers.”

The FCA’s policy statement from March this year estimated that, in a worst-case scenario, up to 1,000 personal investment companies the FCA labelled “high risk” could stop providing DB transfer advice after the rise. The number of companies offering advice on DB transfers is currently 2,426, the FCA found in June.

Ms Butler added: “These things are always difficult, these things are always a balance. But we think in this case that it's a balance well made, and if there are a few advisers who are unable to get cover, that might be indicative of the nature of work that they are doing and the risk associated with it.”

But the FCA’s defence of its compensation limit hike has left some commentators unconvinced.

The FCA estimated that around 500 consumers a year who file high-value complaints would benefit from the rise. This figure was revised down from initial estimates of 2,000 a year, after questions were raised about its accuracy.

Sir Steve Webb, director of policy at Royal London, said: “The FOS limit increase was unnecessary, and the FCA badly overestimated the number who would benefit. The FCA are simply not giving enough weight to the importance of consumers being able to access affordable transfer advice, and their actions to date have reduced the supply, which cannot be to the benefit of consumers.”

Sir Steve’s remarks were echoed by James Ellison, chair of the Pensions Administration Standards Association’s DB transfers working group and head of operations at WPS Advisory.

Mr Ellison said the compensation limit rise will make it more difficult for trustees to ensure members have access to quality DB transfer advice: “It reduces choice because it shrinks the available marketplace.”

Mr Ellison said a smaller IFA market strengthens the case that trustees should embed a trusted adviser for members.

“Data suggests that appointing an adviser that is a specialist in this market will provide more certainty for scheme members that the advice they get is suitable, the charges they get are transparent and realistic based on the work required. Ultimately this better protects members interests,” he said.