Dear CEO | Release Date: 23rd March 2019
To read a shorter summary of this Dear CEO letter, click here.
To access the original FCA document, click here.
Long Summary
The Financial Conduct Authority (FCA) has issued a comprehensive directive to CEOs of firms that manage the transition of pension funds from Defined Benefit (DB) schemes to Defined Contribution (DC) products. This follows extensive evaluations aimed at mitigating risks and enhancing the protection of consumers involved in these transfers. The FCA’s letter delineates the outcomes of its recent review of pension product providers and articulates specific expectations for these firms, emphasising the critical areas that require immediate attention to safeguard consumer interests.
Overview of Regulatory Concerns and Focus
Context of the Review
The FCA’s review was necessitated by ongoing concerns about the potential risks consumers face when transferring their pension holdings from DB to DC schemes. This process has been under scrutiny, especially since the introduction of pension freedoms in April 2015, which significantly altered the landscape of pension savings and investments.
Detailed Expectations for Pension Product Providers
Product Design and Target Market Considerations
Regular Reviews: Providers are expected to conduct regular and thorough reviews of their DC products to ensure they align with the evolving needs of customers transitioning from DB schemes. This is especially pertinent for products developed prior to the 2015 pension freedoms.
Target Audience Identification: It is crucial for providers to accurately identify and understand their target customer demographics. These insights should inform product designs and associated support services, ensuring they meet the specific needs of this group.
Management Information Systems: Providers must have robust management information systems that furnish senior managers with detailed and actionable insights. This will enable them to confidently manage incoming DB business and make informed decisions.
Communication and Information Provision to Distributors
Quality Assurance of Messaging: Providers must ensure that their communications to advisory firms are constructed to be balanced, clear, and accurate. This involves setting up stringent governance and quality assurance processes to review these messages continuously.
Encouraging Responsible Recommendations: It is critical that all communications reinforce the principle of treating customers fairly and discourage any practices that might lead to inappropriate recommendations.
FCA Permissions and Compliance Checks
Verification Processes: Providers often rely on manual, retrospective methods to verify whether advisers have the necessary permissions to conduct pension transfers. The FCA expects providers to maintain up-to-date checks and act immediately if discrepancies are discovered during periodic reviews.
Management Information (MI) Requirements
Detailed Metrics: Providers need to enhance their MI capabilities to detect and respond to negative trends effectively. This includes monitoring high volumes of transfers or frequent movements of funds out of new DC arrangements, which could indicate problematic advisory practices or consumer dissatisfaction.
Completeness of MI: The MI should cover all transfer scenarios comprehensively, including those executed through different platforms, to ensure a complete understanding of the provider’s risk exposure.
Remuneration Structures
Balanced Incentive Schemes: Remuneration schemes should not solely focus on volume-driven metrics. Instead, they should incorporate measures that reflect the quality of customer outcomes, ensuring that the compensation incentives align with the best interests of consumers.
Governance and Risk Management Practices
Comprehensive Reviews: The implementation of second and third-line reviews is recommended to assess and strengthen the controls around DB transfer activities. These reviews should help identify any gaps in risk mitigation strategies and prompt appropriate corrective actions.
Documentation and Advisory Tools: All tools and documentation provided to advisers must be current and compliant with recent regulatory updates, such as PS18/20. Providers should regularly review these materials to ensure they offer a balanced perspective on the advantages and risks associated with DB to DC transfers.
Conclusion and Future Directions
Ensuring Compliance and Effective Implementation
Providers are urged to confirm their adherence to the PROD guidelines, the RPPD, and all relevant regulations. They should also ensure that all measures implemented are effective and compliant with the outlined expectations.
Strategic Imperatives
Robust Review and Adaptation Processes: Firms must continuously evaluate and enhance their product offerings, advisory tools, and governance processes to ensure they remain aligned with regulatory expectations and consumer protection standards.
Proactive Management and Engagement: It is vital for providers to engage actively in managing risks associated with pension transfers, maintaining a proactive stance in compliance checks and advisory oversight.
Ongoing Regulatory Engagement
The FCA intends to maintain a vigilant oversight of practices in this area, prepared to intervene with regulatory measures where non-compliance or potential consumer harm is identified. Firms are expected to collaborate closely with the FCA, ensuring transparency and responsiveness in their operations.
This extensive guidance from the FCA serves as a crucial framework for firms handling pension transfers, urging them to reinforce their systems and controls to better protect consumers and ensure the integrity of their pension offerings in the dynamic regulatory environment.