The customer (Mr C) complained to the Financial Ombudsman Service(the Ombudsman) that the advice he had received from Portafina LLP (the Adviser) in relation to a potential transfer from his occupational defined benefits scheme to a self-invested personal pension (SIPP) was unsuitable.
Although the Adviser had recommended against the proposed transfer, the Ombudsman ruled that its advice had not set out Mr C’s options fully and in an understandable manner. It was fair and reasonable in the circumstances for the Adviser to compensate Mr C to the extent necessary to put him in the position he would have been in had he not transferred, and assuming that he had taken his pension at age 60. In addition, a £400 award was made for distress and inconvenience, and interest was ordered at 8 per cent for any compensation payment delayed beyond 90 days.
Facts of the case
In 2011, Mr C sought advice from the Adviser on a potential transfer from his DB occupational pension scheme (the Scheme), in order to “make home improvements and create an emergency fund”.
After obtaining information from the Scheme, the Adviser wrote to Mr C in November 2011, setting out the benefits that would be payable. As the critical yield required on the transfer value to match the Scheme was 10.1 per cent, it recommended that Mr C did not transfer. If Mr C still wanted to transfer, the Adviser could help but it would have to treat him as an insistent customer. In that case, Mr C would need to complete an insistent customer form which it included with the advice letter. It would then, it said, send him a copy of its detailed advice report.
Mr C signed a form saying he still wanted to transfer, and also the insistent customer form on November 17, 2011, which confirmed he understood he would be worse off in retirement if he proceeded with the transfer. Later the same month, a Pension Release Report was sent to Mr C which confirmed the transfer would be against advice and that he would therefore be treated as an insistent client.
The report then outlined the different options that were available in respect of income and tax-free cash, but did not recommend a scheme pension as Mr C had indicated he wished to have access to his tax free cash entitlement, with no income being withdrawn. It also recorded that Mr C had a moderately cautious attitude to risk but that he had told the Adviser that he was aware of the down falls in taking his benefits but due to his current circumstances still wished to do so.
The Adviser then recommended a transfer to a SIPP, invested in various funds. Mr C, through his representative, subsequently complained to the Adviser that the advice to transfer was unsuitable, but this complaint was not upheld and it was subsequently referred to the Ombudsman.
The adjudicator noted:
- the regulator’s Conduct of Business Rules said that firms should start on the assumption that advice to transfer will not be suitable;
- the advice was unsuitable given Mr C’s particular circumstances;
- the Adviser had not complied with the regulator’s Principles for Business in treating Mr C as an insistent customer and arranging the transfer; and
- the Adviser should have refused to accept the SIPP business.
The Ombudsman’s provisional determination
The Ombudsman held that:
- if the Adviser had properly explained the risks, particularly in light of the use of the tax-free cash and that a new conservatory was not a necessity, it was unlikely Mr C would have insisted on transferring against advice;
- the SIPP funds selected presented a higher degree of risk than that Mr C had agreed to take;
- it appeared that Mr C’s circumstances subsequently changed and he had a real need to take his pension around the time he reached aged 60 (that is, prior to the Scheme’s normal retirement age of 65). Therefore the calculation of compensation should be based on an assumption that Mr C had taken his benefits on the date he reached his 60th birthday;
- the calculation should be made in line with guidance as updated by the Financial Conduct Authority in October 2017, as at the date of the Ombudsman’s final determination;
- the Adviser could also contact the DWP to obtain Mr C’s contribution to SERPS/S2P in order to include a “SERPS adjustment” in the calculation; and
- Mr C should be paid £400 for distress and inconvenience.
In addition, the Ombudsman recognised that the SIPP investments were likely to be illiquid. If the Adviser was unable to buy the investments from the SIPP, it should pay Mr C an upfront lump sum equivalent to five years of SIPP fees, which was a reasonable period for the SIPP to be closed. Mr C should be asked to provide an undertaking to the Adviser to repay it any future SIPP returns.
Compensation must be paid to Mr C within 90 days of the date the Adviser’s receipt of his acceptance of the ruling. Simple interest at a rate of 8 per cent p.a. must be added for any settlement time in excess of 90 days, except where delays in the SERPS adjustment calculation were attributable to the DWP.
The parties were then invited to provide any further evidence or arguments for the Ombudsman to consider before he made his final decision.
The Ombudsman’s final determination
Neither party having provided any further evidence for the Ombudsman to consider, he decided it was fair and reasonable for the Adviser to calculate and pay compensation to Mr C as set out in the provisional decision.
Mr C was asked to accept or reject the decision by September 1, 2018.
View the determination.
This decision will set alarm bells ringing with advisers and it seems particularly harsh. It appears that individuals are becoming increasingly absolved from responsibility for decisions relating to their own finances. Are advisers now expected to delve into the relative merits of an individual’s spending plans for funds they have been advised not to transfer? In terms of pensions flexibility and accessing DB benefits under the pensions freedoms regime, it seems likely that advisers will be more reluctant to provide the required advice to DB members before a transfer of “safeguarded benefits”.
On the other hand, the Ombudsman’s view was that the adviser here should have set out in very clear terms the relative advantages and disadvantages of the complainant’s proposals to access his pension fund for the tax-free cash and reinvest in a SIPP. Advisers should take note. It is also probably unwise to advise against a transfer but then in the same communication to tout for the ongoing business if the member decides not to follow that advice.
As we note in our article above, the FCA has published rules on improving the quality of pension transfer advice and changes started to come into effect on October 4, 2018, with more to follow on January 1, 2019.