Transfer bias at the FCA
Prompted by talk of a feeding frenzy at Port Talbot, I've written a lot about what could explain the media and regulatory bias against transfers from DB to DC pensions. There are two linked strands I have pointed to: a culture of paternalism (Nanny knows best) and a failure to comprehend the reasons why transfers are now highly likely to increase personal welfare whereas once they were not. They are linked because paternalism can distort how welfare is defined.
In my previous post accusing the Work and Pension Select Committee of paternalism in its comments on pension transfers for members of the British Steel Pension Scheme, I suggested the FCA was also being blind sighted by a paternalist bias that treats Pension Freedoms as posing a risk of poor consumer decision-making that only prescriptive advice rules can guard against.
Evidence of FCA bias followed quickly. How else are we to interpret the comments made by FCA Chief Executive Andrew Bailey in reply to the scathing criticism, also in an open letter, from the WPSC Chairman, Frank Field, of the FCA's dilatory approach to protecting BSPS members from scammers and vultures. It includes this telling statement:
I'd like to underline an important point about advice to transfer out of a DB scheme. While the advice to transfer out of a DB pension scheme is generally unlikely to be in the consumer's best interests, it will not always be unsuitable for the individual consumer's circumstances. What is important is that the advice is suitable for the individual consumer's needs, and this is what we require. We have also received correspondence from individuals, both in the context of BSPS but also separately, to set out that they do wish to transfer out of a DB scheme, and appreciate the decision they are making.
If you are wondering why he went out of his way to make this distinction between what people want and what they need, the clues were already in the FCA's consultation paper (cp17/16) last summer on changes to the rules (paragraph 4.10):
While a client’s objectives may be the reason they have sought advice, the client’s needs should influence the advice process. Firms should challenge the realism of a client’s objectives, where appropriate including any objectives which do not immediately appear to be rational or factually correct. A recommendation is unlikely to be suitable if it meets the client’s objectives but not their needs.
Though it sounds reasonable enough, this still triggered maximum alarm on our paternalism detector. In our response to the consultation we told the FCA:
No, we do not agree with the logic or practicality of 4.10. The presumption that advisers are more rational than clients, or better able to decide what makes up their personal utility, is speculative. It is anyway at odds with the importance given in the FCA rules and FOS reviews to what clients say about themselves. If in any area of advice a professional feels a client has not reached the same conclusion they would, when provided with the same complete, unbiased and (where possible) quantified information, they as agent must then assume they have not yet correctly defined what makes up their client’s actual utility. They must consider what it is that would rationalise the conclusion and test that with the client. It is perfectly possible that the implied justification is emotional. If this implied justification in fact holds and a client then persists in their decision, they are not an insistent client: the adviser is an insistent adviser, insisting on imposing their own utility, values, risk preferences or emotions on their client. The best the FCA can do to deal with differences in the way agents and principals make value judgements is to focus on the process that forces the quantities relevant to the value judgement to be addressed...
The proposed changes do in fact prescribe some quantification that would help counter common instances of 'cognitive dissonance', such as showing equivalent values for each of capital amounts and cash flows; and using insurance pricing to put a proper scale on death-benefit differences. But it is still difficult to imagine that these alone would remove any possible bias that an annuity is generally a source of greater welfare than drawdown, which is at the heart of both the old and new rules.
Indeed, it is impossible without this annuity presumption to explain why transfers are generally a bad thing, when the rationale based on QE-induced real yields generating exceptional CETVs, in turn generating exceptional income purchasing power via Pension Freedoms, is so overwhelming. This inevitably taints everything the FCA has to say about its findings when investigating the advice given by firms hitherto. It could explain, for instance, why, in a significant proportion of cases it has reviewed, it found it could not say whether the advice was suitable or not, whereas it said this is rarely the case with other advice. Without more information about what specific factors lead to this ambiguity, the FCA's findings must be questionable. Perhaps the dominant factor was that the assessor imposed his or her own utility on the question the FCA conspicuously believes important: whether there is a conflict between what they want and what they need.
By way of footnote, Andrew Bailey's measured rebuttal of the inflammatory remarks made by Frank Field included the important news that in its reviews of BSPS transfer advice it found no evidence that the products recommended included any scams.