The FCA is considering the revision of the calculation of redress an entity has to pay in case of unsuitable advice given to a client regarding joining a private pension scheme. According to the officials at the Financial Conduct Authority (FCA), the current methodology that is used to calculate the redress does not provide the financial security that was guaranteed before. The present method to calculate the redress by the Financial Ombudsman Service was designed for the Pensions Review scheme that took place in the 1990s.
Pension transfer advice is given or sought by clients who want to leave the benefit of a defined pension scheme, that guarantees retirement income, in preference for seeking higher returns on their investments elsewhere. If the advice is not provided with a fiduciary duty or is not properly given there can be consequences for the clients. This can mean that the client doesn’t understand the risk in such schemes and/or doesn’t see the returns materializing. They may even face losing their original capital. A redress, in case such a mishap arises, is the amount that has to paid by the firm or the individual who gave such unsuitable advice to the client.
The aim of revamping this method will be to define a methodology that calculates the redress fees in a way so that the consumer is back in the financial situation that they would have been if they hadn’t followed the advice to pursue a private pension scheme. The review is scheduled to take place in autumn later this year.
The regulator said it that intends to consult on changes to the current methodology in autumn this year and will try to reach a conclusion by the spring of 2017.
The FCA dictates that the inherent principles to deal with such complaints will remain the same. These being the treatment of such complaints in a fair and prompt manner.
The Financial Conduct Authority stated that if an outcome of such a case will be desired under the current regulations, then it won’t consider it fair treatment for the firm to settle the matter with a client through any kind of financial payment before this review is complete. This regulation will remain in place until an outcome has been reached. The firm will write to the customer explaining why such a response is not suitable. The firm will be advised to consider other options for dealing with such a complaint on an interim basis until a consensus is reached. This may include offering a provisional redress and then providing a final payment at a later date when the result of the consultation is known.
However, some like the pensions director at Aegon, Steven Cameron, questioned if the consultation is the only solution to this problem.
He thinks that rather than reviewing the redress methodology, the authority should make efforts to improve the process of deciding what is considered good advice on moving out of defined benefit schemes. According to him, using a simple formula for return on capital invested in an annuity is no longer an appropriate comparison to the flexibility that private pension schemes provide to the transferees. A review to the redress calculation methodology can be made when these factors have been considered.