Recording Client’s Understanding

The FCA’s policy statement on Defined Benefits (PS20/6) focused on the need to ‘empower consumers to make better decisions by improving how advisers disclose charges and requiring checks on consumers’. The aim is to improve a customer’s understanding during the advice process, and this is the element this blog will focus on.

The term ‘advice’ is used to highlight a ‘recommendation of what you should do’, and the FCA now requires the firm to evidence that the client is making informed decisions when it comes to defined benefit transfer advice. Specifically, the FCA state:

“The firm must get evidence that the client can demonstrate they understand the risks to them of proceeding with a pension transfer or conversion before finalising the recommendation, and keep a record of this evidence”.

The question is, what’s the best way to do this? Unhelpfully, other than highlighting this as a new requirement, the FCA has been pretty quiet in terms of what this might look like, or what might be considered good practice. Not ones to be easily thwarted, we have put our heads together to figure out how this can be incorporated within an advisory process, in a practical and useful way.

In our opinion, the most appropriate part of the advice process to confirm a client’s understanding would be within the conversations around risk. We feel that as well as completing a client’s tolerance for loss questionnaire, establishing Capacity for Loss and knowledge and experience, this meeting is the ideal time to include the additional requirements of the impact of a transfer risk.

We often see transfer risk to be questions that refer to either soft facts or information about dependents needs, health or investment risk which don’t really validate the clients understanding of the risk of transferring away from a DB scheme.

There is therefore the opportunity to use this stage to confirm what the client understands about the risks and the impact of losing safeguarded benefits.  To fulfil the FCA’s requirements, this should be a process that allows you to evidence the clients understanding in their own words.

As an example, you could ask:

“Your existing occupational pension will provide you with a secure income for the rest of your life.  Tell me why you are willing to give this up?”

Once you have gathered the responses this will also help to ensure the client has a suitable understanding during the advice process and is likely to also assist in finalising your recommendations.