We highlight the increased risks to consumers when overseas firms refer defined benefit scheme members to UK firms for pension transfer advice. We also confirm our expectations of UK firms.
We are concerned about overseas firms targeting the UK pension benefits of defined benefit (DB) scheme members living overseas.
UK firms engaging with overseas firms or offering advice to scheme members based outside the UK should have regard to their regulatory responsibilities. This includes the Consumer Duty, particularly to act proactively to deliver good outcomes for retail customers and to avoid causing foreseeable harm to retail customers.
Overseas advice model
The ‘overseas advice model’ works as follows:
- The member, based overseas, is approached by an overseas firm about transferring their UK Defined Benefit (DB) pension benefits into an alternative pension arrangement. This is often an overseas pension arrangement or a UK-based international self-invested personal pension (SIPP) holding offshore investments.
- Where the scheme member has a cash equivalent transfer value (CETV) over £30,000, they must receive ‘appropriate independent advice’ from an FCA-authorised firm before scheme trustees can transfer pension benefits to a defined contribution (DC) scheme. This is a requirement in section 48 of the Pension Schemes Act 2015. This requirement applies whether the member is based in the UK or overseas. Members with a CETV below £30,000 may also choose to receive transfer advice or arrange transfers without advice.
- The overseas firm usually introduces the scheme member to a UK advice firm solely for advice on transferring their DB pension funds. The overseas firm will usually advise on or arrange the proposed arrangement for the transferred funds.
- Once it’s confirmed that the member has received ‘appropriate independent advice’ on the transfer from the UK firm and on the member’s request, the overseas firm contacts the UK DB scheme trustees to arrange the transfer of the member’s pension benefits into the alternative pension arrangement and offshore investment.
- DB scheme trustees will review the application to transfer and have separate duties that are set out in the detailed guidance from the Pension Regulator (TPR) ‘Dealing with Transfer Requests’.
The overseas firms are not FCA authorised but may be regulated by an overseas regulator. The level of consumer protection available in relation to the activities of these firms will depend on the overseas regulatory regime.
Relevant FCA rules
- Relevant rules and guidance include SYSC 6, COBS 2, COBS 9, COBS 19, Principles 2, 3, 6, 7 and 9 and the FCA’s Finalised Guidance 21/3 (FG 21/3).
- From 31 July 2023, the Consumer Duty (Principle 12 and PRIN 2A) sets higher and clearer standards of consumer protection across financial services and requires firms to put their customers’ needs first. For more information, see the Finalised Guidance 22/5 (FG22/5). Where firms are dealing with customers outside the UK, the Duty applies in the same way as existing sectoral Sourcebooks or other sectoral rules or guidance. So, when providing pension transfer advice to customers who are not based in the UK, we expect UK authorised firms to have regard to their responsibilities in relation to:
- The Consumer Principle: A firm must act to deliver good outcomes for retail customers.
- The cross-cutting rules:
- A firm must act in good faith towards retail customers
- A firm must avoid causing foreseeable harm to retail customers
- A firm must enable and support retail customers to pursue their financial objectives
- The Outcomes, which are a suite of rules and guidance setting more detailed expectations for firm conduct in four areas that represent key elements of the firm-consumer relationship and the Products and Services outcome and the Price and Value outcome.
Our assessment of harm
The likelihood that overseas advice models result in poor consumer outcomes increases when:
Situation 1
UK advice firms fail to carry out adequate due diligence on the activities of overseas firms involved in the recommendation.
| Risk to UK advice firms | Risk to consumers |
|---|---|
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A UK advice firm should:
If the UK firm does not carry out due diligence it may run the risk of:
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Advice on the receiving scheme and/or the underlying investment provided by the overseas firm might be unsuitable for the member, including having regard to their risk profile (risk they were willing and able to take) and circumstances. The member’s ability to get redress from the overseas firm will depend on the overseas regime in which the firm operates and the member being able to provide sufficient evidence of wrongdoing by the overseas firm considering local requirements. In some cases, the member may end up in a pension scam. |
Situation 2
The UK advice firm has little or no interaction with the member, relying on information provided by the overseas firm.
| Risk to UK advice firms | Risk to consumers |
|---|---|
|
The UK advice firm may not have properly considered the member’s particular circumstances and so may not have made a recommendation based on a detailed consideration of those, as required by FCA rules. This puts the UK firm at risk of:
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Advice on the receiving scheme and/or the underlying investment provided by the overseas firm might be unsuitable for the member, including having regard to their risk profile (risk they were willing and able to take) and circumstances. The member’s ability to get redress from the overseas firm will depend on the overseas regime in which the firm operates and the member being able to provide sufficient evidence of wrongdoing by the overseas firm considering local requirements. In some cases, the member may end up in a pension scam. |
Situation 3
The UK advice firm confirms ‘appropriate independent advice’ to DB scheme trustees where they have given abridged (not full) advice to the member.
| Risk to UK advice firms | Risk to consumers |
|---|---|
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Abridged advice is not full advice. The requirements for abridged advice are in COBS 19.1A. A UK firm providing confirmation of advice when they have only provided abridged advice will not have complied with the FCA’s rules on pension transfers in COBS 19 (in particular COBS 19.1A.5R). The UK firm will not have taken reasonable steps to give suitable advice to the member or to ensure that they understand the risks of transfer relevant to their circumstances. They may also be misleading the DB scheme trustee if they issue a confirmation letter. The firm may also not comply with the Consumer Duty. In particular the requirements for the firm to act in good faith, and to enable and support retail customers to pursue their financial objectives. |
The member transfers out of the DB scheme after receiving abridged advice. The member receives incomplete advice to transfer and is exposed to a higher risk of unsuitable advice. |
Situation 4
The UK advice firm does not adequately consider the effect of all charges on the member in their advice on the transfer, where charges on overseas investment products can often be complex and, in some cases, higher than the potential investment growth on a realistic projection.
| Risk to UK advice firms | Risk to consumers |
|---|---|
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A firm must compare the charges in the schemes as part of its appropriate pension transfer analysis (COBS 19.1.2BR). A firm which advises members without considering the effect of charges should be aware that the overseas firms could be recommending an unsuitable investment to the member due to the high charges. These sorts of complex charging structures or high charges can indicate an investment scam. This puts the UK advice firm at risk of acting in breach of our rules, including for example, Principles 2,3, 6, 7, 9 and COBS 2.1, 9 and 19, considering FG 21/3. The firm is also at risk of not complying with the Consumer Duty. In particular, the firm would need to consider the Price and Value Outcome. This requires firms to consider if the products and services they distribute provide fair value to customers, including all applicable fees and charges over the lifetime of the relationship between customers and firms. |
The member receives unsuitable advice to transfer or does not understand the risk of the investment. The transaction offers no value or negative value to the consumer. The nature of these charges and the impact on growth may not be disclosed to the client as the overseas regime is different to that in the UK. So consumers may not appreciate the risks of this investment. |
Situation 5
The UK advice firm recommends that the member remain in their scheme. The member subsequently becomes ‘insistent’ and requests the UK firm arrange a transfer. There are indications of coaching or that the member was acting under the influence of the overseas firm.
| Risk to UK advice firms | Risk to consumers |
|---|---|
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The UK advice firm should assess the risks of detriment the overseas firms’ activities pose to the firm’s advice to clients or client’s understanding of risk and take appropriate corrective action. For example, the overseas firm may be seeking to coach or influence the client to transfer against the advice of the UK firm, which ultimately undermines the advice provided by the UK firm in line with Principle 6 and 9, COBS 2.1, 9 and COBS 19 considering FG 21/3). Similarly, the UK firm should consider its responsibilities under the Consumer Duty, particularly the Products and Services Outcome, and whether receiving business from the overseas firm enables it to deliver good outcomes for consumers. Firms should also consider the Consumer Duty Guidance FG22/5 paragraph 5.36 on insistent customers and consider if they are adequately supporting customers to understand the consequences and risk of their decisions. The UK advice firm should assess the risks of detriment the overseas firm poses to its clients. It should also ensure that it sets out clearly the risks of proceeding against advice, in line with our guidance on advising on pension transfers (see paragraph 5.64 of FG21/3) and in COBS 9.5A. |
The members suffer poor outcomes due to the UK firm’s failure to identify and manage risks. Members who become ‘insistent clients’ and allow the overseas adviser to arrange a transfer against advice provided by a UK firm (likely under the influence of the overseas adviser firm) will not be able to seek redress from the UK firm. |
What you should do
Harm prevention and detection
You should consider the risk of consumer harm and how you can support good consumer outcomes. For example, by:
- ensuring that you have adequate procedures, systems, and controls to detect and prevent financial crime
- carrying out robust due diligence of the overseas firm when engaging with them, including:
- checking and satisfying that the overseas firm does not need UK authorisation, including for any activities it may be carrying out for the member after you provide advice
- checking the overseas introducers’ activities for indicators of fraud or scam activity
- if the due diligence suggests there is a heightened risk of harm including fraud or financial crime:
- consider only working with an overseas firm if you carry out the arranging activities or not working with the overseas firm at all
Once an arrangement has been entered into with an overseas firm, you should ensure that you carry out sufficient due diligence. This includes by:
- ensuring each introduction has been sourced legitimately
- carrying out adequate oversight and monitoring of the activities of the overseas firm to:
- understand how the overseas firm is using your firm’s name, documentation and presenting your advice to their client
- monitor the rate of insistent clients who are acting against your advice for an indicator of poor outcomes, eg fraud or scam activity or unusual levels of insistent clients. Unusually high levels of insistent customers which may indicate consumer harm including, in some cases, fraud or scam activity
- ensuring you have contact with the introduced member to:
- verify the information provided so that you can gather the necessary information to provide advice
- identify circumstances where the member may be being influenced into a transfer against their best interests
- if there are concerns about poor consumer outcomes you can take steps to terminate the relationship and alert the relevant authorities where you suspect scam activity or concerning transfer practices
Consumer Duty
In relation to the Consumer Duty, UK advice firms will be seen as manufacturers of a DB transfer advice service. So you will need to:
- consider if overseas clients are in the intended target market for the service. For example, if you decide that overseas clients are part of the intended target market, you need to ensure that this service:
- meets the identified needs, characteristics and objectives of customers in the identified target market
- does not adversely affect groups of customers in the target market, including groups with characteristics of vulnerability
- avoids causing foreseeable harm to customers in the target market
- is distributed to customers in the target market
- regularly review the service to ensure it remains appropriate for the target market
What we will do
Where we become aware that a firm is engaging in practices that are likely to result in significant consumer harm, we will take appropriate action. For example, where we suspect serious misconduct, we will consider an enforcement investigation.
