Despite the very limited holiday options currently available, here at ATEB, we have never been so busy so a break in August would have been out of the question anyway. That August simply whizzed by explains why this is the first opportunity we have had to comment on a FOS decision that was publicised at the end of July.

We have written about replacement business and, in particular, pension switches several times before because we see a lot of switches being done in firms, many of which are not suitable and even more not compliant. You can read previous articles here. The recent FOS decision was in relation to yet another pension switch that the FOS found wanting, resulting in the firm concerned having to refund over £5,500 in fees they had charged the client and to compensate the client additionally for investment loss attributable to the switch. So here we go again!

Why do switches fail at the FOS?
Clearly there will be a variety of reasons why complaints are upheld by the FOS. Nonetheless, a quick trawl through a few cases does indicate that the primary reason is that the switch resulted in an increase in costs. This does not automatically render a switch unsuitable as the switch might bring with it a number of other benefits. However, there are two main problems with many switches. First, that the perceived benefits are often not obviously tangible or substantial enough to warrant the additional costs incurred.

The second problem is of even greater concern – namely that the cost comparison required by COBS rules was either not done at all or, if done, it did not fully present the client with a clear indication that costs would increase, or the impact that the additional costs could have on future returns. In many cases, advisers continue to compare the costs of Plan A with Plan B, resolutely refusing to acknowledge that the rules require the comparison to take account of ALL charges that will apply, including initial and ongoing adviser charges. Here are a few quotes from published FOS decisions.

“Miss W also received a switching report as part of the advice to transfer her pension plan. This compared her existing pension plan against what could be achieved if it was transferred to the new provider. This comparison didn’t however include the 1% charge for ongoing advice. The adjudicator that looked into the complaint thought it should be upheld as he didn’t think the charges had been sufficiently disclosed. He also said that as the ongoing advice charge wasn’t included in the switching report, Miss W wasn’t able to make an informed decision on whether the transfer was in her best interest.” 

“The firm stated that the SIPP was suitable for Mrs C as it had lower charges than the personal pension. Although the SIPP had a 0.5% annual management charge, there were other charges associated with the transaction. There was a 5% initial charge, 1% ongoing charge and charges against the underlying funds. I’m satisfied the overall charges for the SIPP were higher than Mrs C’s original pension.” 

“The cost comparison the firm provided to Mr A was misleading when it stated that the SIPP needed to generate a return of 0.19% per year more than his personal pension in order to produce the same return – our adjudicator noted this comparison failed to take into account both the 3.50% initial adviser charge and 1.00% annual adviser charge associated with the switch into the SIPP.”

All of which simply confirms what the Regulator stated in the major guidance paper from July 2012 on the topic of replacement business.

“Where the advice is to switch or transfer an existing investment to a new investment, we expect to see firms conduct a cost comparison between the two solutions. Firms should consider all the costs associated with the existing investment and the recommended product or portfolio.”

This guidance now exists as a rule in COBS 9 and COBS 9A.

And also …
Often running alongside a missing or non-compliant costs comparison is the failure to consider whether identified ‘issues’ with the client’s existing plan can be addressed without incurring the extra costs of switching. They often can be. Here is a quote from one FOS decision relating to the commonly seen twins – ‘your existing plan does not match your risk profile’ and ‘your existing plan has limited fund choice’.

“The firm assessed Ms C as having a “highest medium” attitude to risk and said the fund she was invested in wasn’t consistent with this. But there would of course have been other alternative funds to which Ms C could have switched within the Scottish Widows plan if indeed her risk appetite was greater. I’m not persuaded that Ms C would have wanted or needed a particularly extensive or exotic array of funds or investments which could only have been accessed through a SIPP. Her other assets and circumstances suggest to me that the range offered by a well-established provider such as Scottish Widows should have sufficed for her purposes. And if Ms C had needed an annual review to monitor whether the chosen fund (or funds) remained suitable, then this could have been achieved without the need to transfer to the SIPP.”

It is worth noting in passing that the last sentence of this quote hints at another reason we sometimes see given for switching, namely ‘your existing plan cannot facilitate adviser charging’. This is never a robust justification for a switch. The following statement comes from the same 2012 guidance paper mentioned above.

“We do not consider the ability to facilitate adviser charging to be adequate justification for switching to a new, higher cost solution.”

Default switching
Switching often seems to be a default recommendation when the fact find identifies existing pension plans. And the ‘problem’ with the client’s existing plan often boils down to little more than ‘it’s not in our preferred model portfolio’. The firm’s preferred solution is often more expensive, leading to the difficulty of defending future complaints that is clearly demonstrated in the FOS decisions quoted here.

Switching a plan can of course be in a client’s best interest but, where it will result in increased costs, there has to be a clear and robust justification and the client must understand the impact of increased costs and the benefits that will be obtained in return so as to be able to make an informed decision. Finally, for the switch to be safe, other non-switch options should have been genuinely considered. 

Options that should be considered include, but are not limited to:

• Amending one or more of the existing plans without switching, for example, to correct any risk mismatch or inappropriate funds;
• Amending one or more of the existing plans without switching, to provide missing features, for example, drawdown;
• Considering using one or more of the existing plans (including any workplace pension the client may have access to) as the target arrangement to accept any other plans that it is appropriate to switch.
• Considering whether there are other assets, resources or borrowing that could be used to provide for any immediate cash requirement;
• Drawing any cash requirement from one or more of the existing plans rather than from all;
• If a switch is recommended in order to access benefits flexibly, consider whether that has to be done now or could be deferred until flexible drawdown is actually required.