Why Pension Companies or Banks Do Not Give Financial Advice
Published / Last Updated on 28/06/2024
We receive many calls from clients and new client enquiries every year telling us that they have tried to
- Arrange a pension transfer or flexible drawdown.
- Asked for help choosing investment funds.
- Which mortgage deal should I choose?
- Which bank account or cash ISA is the right one for me?
Only to be told by their bank, insurance company or pension company that they cannot or do not offer advice. Indeed, some pension companies will not accept or allow a pension transfer without a financial adviser being involved. Why is this?
History Part 1: MMR and RDR
The credit crunch crisis of 2008/09 changed financial guidance and advice. Following toxic mortgage debt, banks collapsing and bailouts, the Financial Conduct Authority ordered a Mortgage Market Review (MMR) to tighten up capital adequacy of banks and mortgage lending policies. This was followed by the Retail Distribution (RDR) which from 1st January 2013, the following was required:
- To give financial advice, advisers were required to be qualified to a minimum National Diploma level (A Level equivalent) and be working towards Degree level.
- Commissions were banned and firms were required to quote their clients a fee for pensions and investment advice.
- Commissions could still be paid on pensions and investments when no advice was/is given.
- Commissions were still allowed on insurance protection-based contracts such as home insurance, motor insurance and life insurance.
Many banks, pension, investment, and insurance companies closed down their advisory arms and expanded their ‘direct to consumer’ (D2C) offerings meaning:
- No requirement to recruit or train advisers up to National Diploma or Degree level financial services qualifications.
- No advise means no liability for the suitability of the product or service. The consumer has chosen their own product or service, so it is their problem if they mis-buy.
- No advice means full commissions can still be paid when arranging financial products.
History Part 2: British Steel Pensions Mis-selling
As part of saving British Steel operations on South Wales, South Yorkshire and other sites, the Government brokered deals with firms from India and China to buy out British Steel but they allowed the liabilities of the British Steel pension fund to be transferred to the Pension Protection Fund (PPF) a compensation fund when firms go into liquidation.
This meant that thousands of British Steel workers were encouraged to join British Steel Pension Scheme No 2 and have slightly reduced (still guaranteed) pensions from the British Steel Pension Scheme No 1 transferred to the PPF and guaranteed by the PPF.
Several rogue financial advisers targeted British Steel workers and subsequently ‘advised’ around 9,000 people to give up their guaranteed pension (to be transferred and protected by the PPF) to be diverted away and transferred to their own, none-guaranteed investment linked pension or flexible drawdown scheme.
- This mis-selling scandal has resulted in £millions paid in compensation,
- Some financial advisers being struck off, fined and some potentially facing criminal action.
- Some financial adviser firms failing and both insurers and the Financial Services Compensation Scheme (FSCS) paying compensation claims.
- Professional indemnity insurance costs for advisers have since ‘rocketed’.
- The government and the FCA placed additional restrictions with qualified financial advice becoming compulsory for opting out, giving up or transferring out of guaranteed or defined benefit pension transfer values of £30,000 or more.
- This £30,000 ‘compulsory’ advice limit has now been adopted by many pension companies for non-guaranteed pension transfers too and not just for defined benefit pension transfers and other guaranteed pension transfer opts outs.
- Pension scheme trustees are now required to complete due diligence and are also liable to ensure that pension transfers are made to legitimate schemes.
- This means that many consumers are now forced to take financial advice for non-guaranteed pensions as well as guaranteed scheme transfers.
In summary, it may be no surprise now why many banks, pension and investment companies do not offer advice given the combination of:
- RDR
- High level adviser qualifications.
- Fees only for pension/investment advice.
- Commissions still allowed for non-advised sales.
- No liability for non-advised sales.
- Compulsory advice on certain pension transfers.
