How can trustees give guidance without being on the hook for advice?
Many schemes would like to guide members but are worried about ending up on the advice end of the guidance-to-advice spectrum. Stephanie Baxter looks at the risks and what schemes can do.
At a glance
- Limits on guidance could restrict the help schemes can offer members
- Trustees need to be careful if giving guidance to members
- There are safe routes that schemes can go down
Many schemes would like to offer more guidance to members navigating the new pension freedoms. While the cost of providing it will be an issue for some, the accompanying legal and reputational risks are of greater concern.
Research by the Defined Contribution Investment Forum (DCIF) found that a lack of regulatory clarity means there is still uncertainty among schemes over what actually constitutes guidance and how it differs from advice. Indications by the Financial Conduct Authority (FCA) suggest it intends to limit the guidance end of the guidance-to-advice spectrum.
In the survey of nine large DC schemes, one said: "The limits being placed on guidance could severely limit the help we are able to offer our members as trustees do not want to end up on the hook for advice."
The issue with being seen to be giving financial advice under the Financial Services Markets Act is it would put schemes into a position where they are doing something that they aren't regulated to do. While this is a perennial problem trustees face when providing information to members, it has become more acute since the April freedoms.
The risks of getting it wrong can be high, warns Taylor Wessing partner Rosalind Connor: "Even if you don't do something that is absolutely financial advice, you don't want to do anything that leads a member in future to doing the wrong thing. Even if you're not doing something regulated the much broader concern is that as an employer or trustee you don't want to be saying anything that they then act on and come back to you saying "you shouldn't have been leading me this way."
So how can schemes offer guidance as an addition to the government's free Pension wise without moving into the advice end of the spectrum?
One way schemes currently protect themselves when putting out communications is by including a note at the bottom that says members should get financial advice. This makes it clear that trustees are not telling them what to do.
But Connor says the "terrible risk" is that a lot of members actually want someone to tell them what to do.
"It's very important for trustees and employers to be careful of what is said and not get pushed over this line into telling them what to do," she says.
"The idea is to give people the tools to understand what's being said to them so the effect is probably to get people more educated about pensions. While that is good, members will have a whole bunch of questions and will immediately call the employer and trustees, asking ‘now I understand all this, what should I do?' People in those roles are going to have a lot more calls of that nature and will make it much more important not to say something that can be taken as advice."
One of the key issues is that guidance is regulated by the FCA but trustees are accountable to The Pensions Regulator. Spence Johnson principal Robert Holford says it is unclear how the two watchdogs interact.
"It's another area where they probably need to collaborate," he adds.
Holford says more schemes would go down the guidance route if there was more clarity from the regulators. Connor says giving extra guidance to schemes on such matters is not always terribly helpful given it's not legally enforceable.
There are several routes for schemes to avoid being on the hook for advice. They could use third-party solutions whereby members are given free access to additional guidance or advice as part of the service. Or they could offer to help pay for employees wishing to take independent financial advice.
Connor believes this would be the safest route for schemes that want to go the extra mile.
"This is a relatively low cost option for an employer for which it can get a lot of good will from employees who can see the benefits. It genuinely helps people in answering their questions while batting it away from people ringing up the HR director or pensions manager in the direction that gives rise to future claims."
A future way could be master trusts that end up providing drawdown to include guidance as part of their offering, says Holford.
While most schemes would like to help members as best they can, there are limitations as to what they can do.
As Connor warns: "If you look at the history of cases where people have been sued in relation to their pensions or generally benefits, the dangerous scenario is always where people are tasked to answer questions about things they are not experts in."
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