The UK's Financial Conduct Authority said yesterday (27 April) it was "concerned about overseas firms targeting the UK pension benefits of defined benefit (DB) scheme members living overseas", citing five situations where these "overseas advice models result in poor consumer outcomes".

The UK regulator also highlighted that "where we become aware that a firm is engaging in practices that are likely to result in significant consumer harm, we will take appropriate action. For example, where we suspect serious misconduct, we will consider an enforcement investigation". 

In its ‘Accepting pension transfer referrals from overseas advisers: UK authorised firms' responsibilities', the FCA said UK firms engaging with overseas firms or offering advice to scheme members based outside the UK should have regard to their regulatory responsibilities. 

"This includes the Consumer Duty, particularly to act proactively to deliver good outcomes for retail customers and to avoid causing foreseeable harm to retail customers", it said.  

Explaining what it sees as the "overseas advice model", the FCA said the member, based overseas, is approached by an overseas firm about transferring their UK Defined Benefit (DB) pension benefits into an alternative pension arrangement. 

This is often an overseas pension arrangement or a UK-based international self-invested personal pension (SIPP) holding offshore investments.   

Where the scheme member has a cash equivalent transfer value (CETV) over £30,000, they must receive ‘appropriate independent advice' from an FCA-authorised firm before scheme trustees can transfer pension benefits to a defined contribution (DC) scheme.

This is a requirement in section 48 of the Pension Schemes Act 2015. This requirement applies whether the member is based in the UK or overseas. Members with a CETV below £30,000 may also choose to receive transfer advice or arrange transfers without advice.  

The overseas firm usually introduces the scheme member to a UK advice firm solely for advice on transferring their DB pension funds. The overseas firm will usually advise on or arrange the proposed arrangement for the transferred funds.  

Once it's confirmed that the member has received ‘appropriate independent advice' on the transfer from the UK firm and on the member's request, the overseas firm contacts the UK DB scheme trustees to arrange the transfer of the member's pension benefits into the alternative pension arrangement and offshore investment. 

DB scheme trustees will review the application to transfer and have separate duties that are set out in the detailed guidance from the Pension Regulator (TPR) ‘Dealing with Transfer Requests'.  

The overseas firms are not FCA authorised but may be regulated by an overseas regulator. The level of consumer protection available in relation to the activities of these firms will depend on the overseas regulatory regime.

The UK regulator further set out its expectations of UK firms, citing five situations where there is "likelihood that overseas advice models result in poor consumer outcomes increases" 

  • UK advice firms fail to carry out adequate due diligence on the activities of overseas firms involved in the recommendation
  • The UK advice firm has little or no interaction with the member, relying on information provided by the overseas firm.  Situation 3 
  • The UK advice firm confirms ‘appropriate independent advice' to DB scheme trustees where they have given abridged (not full) advice to the member. 
  • The UK advice firm does not adequately consider the effect of all charges on the member in their advice on the transfer, where charges on overseas investment products can often be complex and, in some cases, higher than the potential investment growth on a realistic projection.
  • The UK advice firm recommends that the member remain in their scheme. The member subsequently becomes ‘insistent' and requests the UK firm arrange a transfer.  There are indications of coaching or that the member was acting under the influence of the overseas firm.  

The FCA also set out a checklist of considerations for advisers:

You should consider the risk of consumer harm and how you can support good consumer outcomes.

For example, by: 
•    ensuring that you have adequate procedures, systems, and controls to detect and prevent financial crime 
•    carrying out robust due diligence of the overseas firm when engaging with them, including: 
o    checking and satisfying that the overseas firm does not need UK authorisation, including for any activities it may be carrying out for the member after you provide advice  
o    checking the overseas introducers' activities for indicators of fraud or scam activity  
•    if the due diligence suggests there is a heightened risk of harm including fraud or financial crime: 
o    consider only working with an overseas firm if you carry out the arranging activities or not working with the overseas firm at all  
Once an arrangement has been entered into with an overseas firm, you should ensure that you carry out sufficient due diligence. This includes by: 
•    ensuring each introduction has been sourced legitimately 
•    carrying out adequate oversight and monitoring of the activities of the overseas firm to: 
o    understand how the overseas firm is using your firm's name, documentation and presenting your advice to their client 
o    monitor the rate of insistent clients who are acting against your advice for an indicator of poor outcomes, eg fraud or scam activity or unusual levels of insistent clients. Unusually high levels of insistent customers which may indicate consumer harm including, in some cases, fraud or scam activity 
•    ensuring you have contact with the introduced member to: 
o    verify the information provided so that you can gather the necessary information to provide advice 
o    identify circumstances where the member may be being influenced into a transfer against their best interests  
•    if there are concerns about poor consumer outcomes you can take steps to terminate the relationship and alert the relevant authorities where you suspect scam activity or concerning transfer practices  

Consumer Duty

In relation to the Consumer Duty, UK advice firms will be seen as manufacturers of a DB transfer advice service. So you will need to: 
•    consider if overseas clients are in the intended target market for the service. For example, if you decide that overseas clients are part of the intended target market, you need to ensure that this service: 
o    meets the identified needs, characteristics and objectives of customers in the identified target market 
o    does not adversely affect groups of customers in the target market, including groups with characteristics of vulnerability 
o    avoids causing foreseeable harm to customers in the target market 
o    is distributed to customers in the target market 
•    regularly review the service to ensure it remains appropriate for the target market

Read the full report here.