UK regulator warns advisers over pension transfer due diligence failings

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The UK’s financial services regulator has warned advisers that they could be held responsible for failing to spot international and domestic pension scams or failing to spot unsuitable investments.

The Financial Conduct Authority said that it will “take action” if due diligence processes – both initial and ongoing – are “not robust”. The warning, issued via a statement this morning, advised pension scheme operators on their responsibilities investors amid a rise in “increasingly sophisticated” pension transfer scams, but added that both financial advisers and pension transfer specialist advisers need to be vigilant and aware of their responsibilities.

The FCA said that its alert highlights some of the “risks arising from authorised firms failing to carry out appropriate due diligence on investment offerings”. While aimed primarily at pension scheme operators, the FCA said that it should be noted and will also be of interest to “financial advisers and those providing discretionary fund management”.

The UK regulator also laid out its expectations of advisers on pension transfers both in the the UK and internationally via a separate statement at the same time.

“If your due diligence processes – both initial and ongoing – are not robust, there is a risk that you may become involved in an illegal scheme,” the FCA warned. “Our intelligence and supervisory activities on pension scams are co-ordinated with our Project Bloom partners and other agencies, and we will take action as necessary”.

‘Unsuitable investments’

“We are aware that some firms have been advising on pension transfers or switches without considering the assets in which their client’s funds will be invested. We are concerned that consumers receiving this advice are at risk of transferring into unsuitable investments or – worse – being scammed.

“Transferring pension benefits is usually irreversible. The merits or otherwise of the transfer may only become apparent years into the future. So it is particularly important that firms advising on pension transfers ensure that their clients understand fully the implications of a proposed transfer before deciding whether or not to proceed,” the statement read.

Advice check

Among its warnings in its statement, the FCA pointed to ‘Section 48 of the Pension Schemes Act 2015’ that requires trustees or schemes managers to check that advice has been taken before allowing a transfer to proceed, where it involved a DB pension or other safeguarded benefits worth more than £30,000 (US$37,318). 

“We expect a firm advising on a pension transfer from a DB scheme or other scheme with safeguarded benefits to consider the assets in which the client’s funds will be invested as well as the specific receiving scheme,” the FCA’s statement read.

“It is the responsibility of the firm advising on the transfer to take into account the characteristics of these assets.”

Sophisticated scams

The FCA warned that scammers are becoming increasingly sophisticated in developing products designed to defeat firms’ due diligence efforts. “We want firms to be aware of the current threats and encourage them to review the effectiveness of their systems and controls,” the FCA said.

It listed ‘first-generation scams’ which offered unregulated physical assets – such as commercial property – for direct investment and ‘second-generation scams’ that obscured those underlying unregulated physical assets by creating a special purpose vehicle (SPV) to acquire them using funding raised by the issue of corporate bonds.

Also, the FCA warned, ‘third-generation scams’ now use the services of a discretionary fund manager to create an investment portfolio that does not require the direct input of the investor; this portfolio then invests in SPV bonds.

The move by the UK regulator follows similar warnings, as reported by authourties in both Jersey and the Isle of Man recently. As reported, both regulators have issued pubic warnings about the rise in pension scams coming from the UK.