FINAL NOTICE

1.
ACTION

1.1.
For the reasons given in this Final Notice, the Authority hereby:

(1) publishes a statement of Mr Hofstetter’s misconduct for failing to comply with

Statement of Principle 7, pursuant to section 66 of the Act;

(2) withdraws the approvals granted to Mr Hofstetter to perform the SMF3

(Executive Director) and SMF16 (Compliance Oversight) functions at

Inspirational Financial Management Ltd (in administration) (“IFM”) pursuant

to section 63 of the Act; and

(3) makes an order, pursuant to section 56 of the Act, prohibiting Mr Hofstetter

from performing:

(a) any senior management function in relation to any regulated activity

carried on by an authorised person, exempt person or exempt

professional firm; and

(b) any function in relation to the regulated activity of advising on Pension

Transfers and Pension Opt Outs carried on by an authorised person,

exempt person or exempt professional firm.

1.2.
The Authority would have imposed a financial penalty of £153,755 on

Mr Hofstetter (reduced to £131,055 as Mr Hofstetter agreed to settle at an early

stage of the Authority’s investigation and therefore qualified for a 30% (stage 1)

discount under the Authority’s executive settlement procedures). However, the

Authority recognises that there may be a significant liability for redress for IFM’s

customers which will likely fall to the Financial Services Compensation Scheme

(“FSCS”). In these circumstances, the Authority has agreed with Mr Hofstetter

that in lieu of the imposition of a financial penalty, the sum of £40,000 be paid

direct to the FSCS to contribute towards any redress due to IFM’s customers. This

is in furtherance of the Authority’s consumer protection objective. In light of the

above and taking into account the exceptional circumstances of the British Steel

Pension Scheme (“BSPS”), the Authority hereby publishes a statement of Mr

Hofstetter’s misconduct.

2.
SUMMARY OF REASONS

2.1.
William Hofstetter, who was responsible for ensuring that IFM provided advice

which met with the Authority’s requirements, incompetently oversaw a defined

benefit pension advice process which resulted in customers’ retirement funds

being put unnecessarily at risk.

2.2.
IFM is a small independent financial advice firm based in Huddersfield, West

Yorkshire. It gave unsuitable advice to customers, most of whom were BSPS

members, to transfer away from schemes which offered important guarantees,

resulting in customers’ retirement funds being unnecessarily put at risk, against

their best interests.

2.3.
Between 8 June 2015 and 22 December 2017 (“the Relevant Period”), IFM advised

at least 307 customers on whether to transfer out of their Defined Benefit Pension

Schemes (“DBPS”). Notwithstanding FCA guidance which created a presumption

of unsuitability in respect of transferring out of a defined benefit pension

arrangement, IFM advised 261 out of 307 (85%) Pension Transfer customers to

complete a Pension Transfer. 231 of the 307 customers (75%) were members of

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the BSPS. The proportion of IFM’s BSPS customers advised to transfer was even

greater – 206 out of 231 (89%).

2.4.
IFM’s customers faced a difficult and very important decision concerning their

pensions during the Relevant Period. Many of these pensions were of significant

value and customers were reliant on the guaranteed benefits offered under their

existing schemes. BSPS customers were required to make this decision in the

context of a high level of speculation at the time about the future of the BSPS due

to a restructuring of the scheme. IFM’s non-compliant advice to transfer out

exposed both BSPS and non BSPS customers to the risk of not being able to meet

their income needs throughout retirement since their income would be dependent

on the performance of the recommended investment. In many cases, IFM did not

have a reasonable basis for believing that those customers could financially bear

any investment risks related to the Pension Transfers which it recommended.

2.5.
One British Steel customer was wholly reliant on benefits from the BSPS as he

had no other assets which could be used to provide income in retirement. IFM

provided him with a cashflow projection indicating that the fund value following

transfer would likely last until age 100, even at low growth rates. However, given

the customer’s likely expenditure in retirement, this was not accurate and in fact

there was a likelihood that the fund would be exhausted in his lifetime.

2.6.
IFM operated a contingent charging model for Pension Transfer advice, meaning

that a customer paid for IFM’s advice only if the customer transferred their defined

benefit pension following IFM’s recommendation. If IFM advised the customer not

to transfer, it received no fee.

2.7.
The total value of the DBPSs on which IFM gave advice was more than £111

million, with an average value of more than £394,000. IFM advised its BSPS

customers to transfer out CETVs with a total value of more than £93 million and

with an average value of more than £455,000. At least 198, or 96%, of those 206

BSPS customers followed IFM’s advice and transferred out. The gross revenue

earned by IFM from defined benefit Pension Transfer work during the Relevant

Period was £1,502,400.61.

2.8.
The Authority has carried out significant work in response to the harm, or

prospective harm, caused to members of the BSPS by authorised firms and their

advisers. The Authority has taken intervention action in the form of requirements

to vary the permissions of relevant authorised firms to mitigate the risk of ongoing

harm to consumers. The Authority has also commenced enforcement

investigations into particular firms and individuals, including the investigation into

Mr Hofstetter.

2.9.
Throughout the Relevant Period, Mr Hofstetter was approved by the Authority to

perform the roles of CF1 (Director), CF10 (Compliance Oversight) and CF30

(Customer) at IFM. Mr Hofstetter was not a qualified Pension Transfer Specialist.

2.10. IFM had another director approved by the Authority to carry out various functions,

but that director had no significant involvement in its Pension Transfer advice. Mr

Hofstetter and the other director are and were throughout the Relevant Period the

only directors of IFM, and Mr Hofstetter is the sole person with significant control

over IFM, owning at least 75% of its shares.

2.11. IFM is an independent financial advice firm based in Huddersfield, West Yorkshire.

It was authorised by the Authority to undertake Pension Transfers and Pension

Opt Outs and to arrange (bring about) deals in investments. IFM went into

administration on 30 November 2023.

2.12. During the Relevant Period, IFM advised 307 customers on whether to transfer

out of their DBPS. IFM ceased providing advice to BSPS customers in December

2017 and, following intervention from the Authority, agreed to cease providing

Pension Transfer advice altogether. 231 out of IFM’s 307 customers (75%) were

members of the BSPS. Notwithstanding FCA guidance which created a

presumption against advising a customer to transfer out of their DBPS, IFM

advised 261 out of 307 (85%), of its Pension Transfer customers to complete a

Pension Transfer. The proportion of IFM’s BSPS customers which it advised to

transfer out was even greater at 89%.

2.13. Mr Hofstetter, in the performance of his Compliance Oversight (CF10) function,

was responsible, in all cases, for taking reasonable steps to ensure that the Firm’s

advice was compliant with the Authority’s rules.

2.14. The Authority reviewed 18 of IFM’s completed Pension Transfer advice files from

the Relevant Period. IFM provided seriously flawed Pension Transfer advice to a

significant proportion of its Pension Transfer customers. For many of its

customers, IFM failed to gather sufficient information from them (including on

their financial situation), meaning that IFM was not in a sufficiently informed

position and should not have given its customers advice on transferring their

pensions. For some customers, IFM provided advice which was unsuitable in light

of the customers’ investment objectives and attitude to risk. Moreover, IFM did

not put its customers in a sufficiently informed position to decide that transferring

out was in their best interests. Some Suitability Reports contained misleading

information, and in 184 out of the 206 BSPS cases where a transfer was

recommended (89%), customers were sent the Suitability Report after the

transfer documents had been submitted to the BSPS.

2.15. Mr Hofstetter, as CF1 (Director) and CF10 (Compliance Oversight) at IFM, was

required to take reasonable steps to ensure that IFM’s Pension Transfer advice

complied with relevant regulatory requirements. However, he failed to establish

adequate systems and controls at IFM to ensure such compliance, with the result

that IFM’s advice seriously fell short of the relevant regulatory requirements in

respect of Pension Transfer advice for a significant proportion of its Pension

Transfer customers during the Relevant Period. For some of its customers, IFM

failed to gather sufficient information from them (including on their financial

situation), meaning that IFM was not in a sufficiently informed position to give its

customers suitable advice on transferring their pensions; for other customers, IFM

provided advice which was unsuitable in light of the customers’ investment

objectives and attitude to risk. Moreover, IFM did not put its customers in a

sufficiently informed position to decide that transferring out was in their best

interests, in providing suitability reports to them which contained misleading

information, and which were provided after they had already signed the forms to

effect the transfer.

FCA’s Principles for Business and Statements of Principle for Approved Persons

2.16. During the Relevant Period:

•
Principle 3 of the FCA’s Principles for Businesses stated that: “A firm must

take reasonable care to organise and control its affairs responsibly and

effectively, with adequate risk management systems”.

•
Principle 6 of the FCA’s Principles for Businesses stated that: “A firm must

pay due regard to the interests of its customers and treat them fairly”.

•
Principle 9 of the FCA’s Principles for Businesses stated that: “A firm must

take reasonable care to ensure the suitability of its advice and

discretionary decisions for any customer who is entitled to rely upon its

judgment.”

•
Statement of Principle 7 stated that: “An approved person performing an

accountable significant-influence function [or, from 7 March 2016, “an

accountable higher management function”] must take reasonable steps

to ensure that the business of the firm for which they are responsible in

their accountable function complies with the relevant requirements and

standards of the regulatory system.”

Mr Hofstetter’s failings in the performance of his CF10 (Compliance Oversight) and

CF1 (Director) functions

2.17. The Authority considers that, during the Relevant Period, by reason of the matters

described in section 4 of this Notice, Mr Hofstetter breached Statement of Principle

7 during the Relevant Period in that he failed, in his capacity as CF1 (Director)

and CF10 (Compliance Oversight) at IFM, to take reasonable steps to ensure that

IFM complied with the relevant requirements and standards of the regulatory

system. In particular, in breach of Statement of Principle 7, Mr Hofstetter failed to

take reasonable steps to ensure that:

(a) IFM obtained the necessary information about the customer, particularly

information concerning the customer’s financial situation, to be able to make

a suitable Personal Recommendation;

(b) IFM properly assessed, on the basis of the information obtained, or give due

consideration to, whether the recommendation was suitable for the customer

and in their best interests, including:

(i)
that the customer could financially bear the risks involved in a Pension

Transfer;

(ii)
whether the Pension Transfer recommended met the customer’s

investment objectives;

(iii)
whether the customer had the appropriate experience and knowledge

to understand the risks involved in the Pension Transfer recommended;

and

(iv)
whether the transfer analysis supported a recommendation to transfer

out of the ceding scheme;

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(c) any or any adequate transfer analysis (TVAS) was prepared for and explained

adequately to all customers comparing benefits likely to be paid under the

DBPS with the benefits afforded by the personal pension or other pension

scheme into which it was proposed that the customer should transfer;

(d) Suitability Reports and the transfer analysis required by the COBS rules were

provided to BSPS customers in a timely manner so that customers were

properly able to make an informed decision;

(e) Suitability Reports provided to BSPS customers were accurate and set out

clearly and adequately the reasons for the Personal Recommendation to

transfer; and

(f) IFM responded appropriately to the significant increase in the volume of

Pension Transfer advice given by Mr Cobill in the second half of 2017.

2.18. The failures set out at paragraph 2.17 above resulted from Mr Hofstetter’s failure

to take the following reasonable steps:

(a) put in place adequate policies and procedures to govern IFM’s pension advice

process and the oversight of that process. Instead, Mr Hofstetter placed

excessive reliance on the expertise and experience of Mr Cobill as IFM’s sole

Pension Transfer Specialist in circumstances where IFM lacked capacity to

monitor or oversee the Pension Transfer advice he provided;

(b) ensure that Suitability Reports, that were prepared by a member of back-

office staff, were reviewed by the adviser or subject to compliance checks

before being issued to customers;

(c) ensure appropriate internal compliance checks (such as regular file reviews)

were conducted on the advice given by Mr Cobill;

(d) ensure that the Pension Transfer advice provided by Mr Cobill received

meaningful external scrutiny;

(e) assess properly the risks arising from the dramatic increase in the volume of

Pension Transfer advice provided by Mr Cobill in late 2017 (including the high

proportion of customers recommended to transfer) and take steps to address

those risks, such as putting in place additional compliance support; and

(f) respond appropriately to the file review conducted by an external compliance

consultant in October 2017 which identified issues with the Pension Transfer

advice given by Mr Cobill to one of IFM’s customers. Instead, IFM continued

to advise customers and generate income on the basis of a process which it

knew or should have known resulted in a significant risk that non-compliant

advice could be given.

2.19. Each of these steps would have been reasonable ones for Mr Hofstetter to have

taken in the performance of his CF10 (Compliance Oversight) and CF1 (Director)

functions, to ensure that IFM complied with Principles 3, 6 and 9 of the FCA’s

Principles for Business, and the relevant COBS rules. Mr Hofstetter’s failure to take

reasonable steps to ensure that IFM complied with the relevant regulatory

requirements created a significant risk that customers would receive non-

compliant Pension Transfer advice.

2.20. The Authority considers Mr Hofstetter’s breach to be particularly serious because:

(a) it caused a significant risk of loss to individual consumers who transferred out

of their DBPS as a result of IFM’s advice. The average CETV of IFM’s Pension

Transfer customers was more than £394,000. The average CETV of IFM’s

BSPS customers was more than £455,000. For many customers, their DBPS

was their most valuable asset and was their only retirement provision other

than their state pension;

(b) as a result of Mr Hofstetter’s failure to discharge properly his responsibilities

as CF10, there were serious and systemic weaknesses in IFM’s procedures,

management systems and internal controls;

(c) Mr Hofstetter gained a substantial, direct benefit from his breach; and

(d) Mr Hofstetter’s breach affected particularly vulnerable people, namely BSPS

members, who were in a vulnerable position due to the uncertainty

surrounding the future of the BSPS.

2.21. The Authority considers that Mr Hofstetter’s conduct during the Relevant Period

demonstrates a serious lack of competence and capability. The Authority therefore

considers he is not fit and proper to perform (i) any senior management function

in relation to any regulated activities carried on by an authorised person, exempt

person or exempt professional firm, and (ii) any function in relation to the

regulated activity of advising on Pension Transfers and Pension Opt Outs carried

on by an authorised person, exempt person or exempt professional firm. The

Authority hereby makes an order prohibiting Mr Hofstetter from performing any

such functions at an authorised or exempt firm.

2.22. The Authority also hereby withdraws Mr Hofstetter’s approval in relation to the

performance of the SMF3 (Executive Director) and SMF16 (Compliance Oversight)

functions at IFM.

2.23. The Authority would have imposed a financial penalty of £153,755 on Mr

Hofstetter (reduced to £131,055 as Mr Hofstetter agreed to settle at an early stage

of the Authority’s investigation and therefore qualified for a 30% (stage 1)

discount under the Authority’s executive settlement procedures). However, the

Authority recognises that there may be a significant liability for redress for IFM’s

customers which will likely fall to the FSCS. In these circumstances, the Authority

has agreed with Mr Hofstetter that in lieu of the imposition of a financial penalty,

the sum of £40,000 be paid direct to the FSCS to contribute towards any redress

due to IFM’s customers. This is in furtherance of the Authority’s consumer

protection objective. In light of the above and taking into account the exceptional

circumstances of the BSPS, the Authority hereby publishes a statement of Mr

Hofstetter’s misconduct for failing to comply with Statement of Principle 7.

3.
DEFINITIONS

3.1.
The definitions below are used in this Final Notice:

“the Act” means the Financial Services and Markets Act 2000;

“APER” means the Authority’s Statements of Principle for Approved Persons and

Code of Practice for Approved Persons;

“the Authority” means the Financial Conduct Authority;

“British Steel Pension Scheme” or “BSPS” means the British Steel Defined Benefit

Pension Scheme that was in place during the period 8 June 2015 to 13 December

2017;

“BSPS 2” means the Defined Benefit Pension Scheme designed to succeed the

BSPS, created after the RAA was put into effect;

“CETV” means cash equivalent transfer value, which is the cash value of benefits

which have been accrued to, or in respect of, a member of a pension scheme at

a particular date. The CETV represents the expected costs of providing the

member’s benefits within the scheme and, in the case of a Defined Benefit Pension

Scheme, the CETV is determined using actuarial assumptions;

“COBS” means the Conduct of Business Sourcebook, part of the Handbook;

“Consultant A” means the compliance consultant engaged by IFM who carried out

a compliance review at the Firm every two months;

“Consultant B” means the compliance consultant engaged by IFM to carry out a

compliance review at the Firm at six monthly intervals, who was first instructed in

2017;

“Defined Benefit Pension Scheme” or “DBPS” means an occupational pension

scheme as defined by Article 3(1) of the Financial Services and Markets Act

(Regulated Activities) Order 2001, namely where the amount paid to the

beneficiary is based on how many years the beneficiary has been employed and

the salary the beneficiary earned during that employment (rather than the value

of their investments);

“Defined Contribution” or “DC” means a common type of pension where

contributions are held in investments until the holder reaches their chosen

retirement age;

“DEPP” means the Authority’s Decision Procedure and Penalties Manual;

“EG” means the Authority’s Enforcement Guide;

“FSCS” means the Financial Services Compensation Scheme;

“the Handbook” means the Authority’s Handbook of rules and guidance;

“IFM” or “the Firm” means Inspirational Financial Management Limited;

“Mr Cobill” means Arthur Jonathan Cobill;

“Mr Hofstetter” means William Hofstetter;

“PCLS” means pension commencement lump sum, an amount of money available

to a member of a pension scheme which may be paid out as a lump sum when

they begin taking pension benefits, and which is not subject to taxation;

“Pension Opt Out” has the meaning given in the Handbook and includes a

transaction resulting from the decision of a retail client to opt out of an

occupational pension scheme to which his employer contributes and of which he

is a member;

“Pension Protection Fund” or “PPF” is a statutory public corporation which protects

people with a defined benefit pension when an employer becomes insolvent. If the

employer does not have enough funds to pay you the pension they promised, the

PPF will provide compensation instead. However, some reduction may apply;

“Pension Transfer” has the meaning given in the Handbook and includes the

transfer of deferred benefits from an occupational pension scheme (with

safeguarded benefits, such as a Defined Benefit Pension Scheme) to a personal

pension scheme;

“Pension Transfer Specialist” has the meaning given in the Handbook and includes

an individual appointed by a firm to check the suitability of, amongst other things,

a Pension Transfer, who has passed the required examinations as specified in the

Training and Competence Sourcebook, part of the Handbook;

“Personal Recommendation” means a recommendation that is advice on transfer

of pension benefits into a personal pension or SIPP, and is presented as suitable

for the customer to whom it is made, or is based on a consideration of the

customer’s circumstances;

“the Principles” means the Authority’s Principles for Business and rules (as

applicable during the Relevant Period);

“Regulated Apportionment Arrangement” or “RAA” means the statutory

mechanism that can be used in corporate restructuring situations where a

sponsoring employer of a DBPS stops participating in the pension scheme (thereby

freeing the sponsoring employer from its financial obligations to the pension

scheme) in order to avoid insolvency, subject to certain conditions being met and

the RAA being approved by The Pensions Regulator and the PPF;

“the Relevant Period” means 8 June 2015 to 22 December 2017;

“Statements of Principle” mean the Authority’s Statements of Principle and Code

of Practice for Approved Persons;

“Suitability Report” means the report which a firm must provide to its customer

under COBS 9.4 which, amongst other things, explains why the firm has concluded

that a recommended transaction is suitable for the customer;

“the Tribunal” means the Upper Tribunal (Tax and Chancery Chamber);

“TVAS” stands for ‘transfer value analysis’ and is the comparison that a firm must

carry out in accordance with COBS 19.1.2R when a firm gives advice or a personal

recommendation about, amongst other things, a Pension Transfer; and

“TVAS Report” means a document that reports to the customer in respect of the

comparison firms are required to carry on in accordance with COBS 19.1.2R.

4.
FACTS AND MATTERS

IFM and Mr Hofstetter

4.1.
IFM is an independent financial advice firm based in Huddersfield, West Yorkshire.

Since 28 July 2003, IFM has been authorised by the Authority. During the Relevant

Period, IFM had a range of permissions to carry on regulated activities, including

permission to advise on Pension Transfers. IFM went into administration on 30

November 2023.

4.2.
On 21 December 2017, the Authority held a conference call with IFM. An

assessment of the defined benefit Pension Transfer work identified problems with

customer files. IFM ceased providing advice to BSPS customers in December 2017

and, following intervention from the Authority, agreed to cease providing Pension

Transfer advice altogether.

4.3.
During the Relevant Period, IFM advised 261 customers to transfer out of their

DBPS, 206 of whom were BSPS members. Mr Hofstetter, an experienced financial

services professional, was approved to perform the SMF3 (Executive Director) and

SMF16 (Compliance Oversight) roles at IFM and was also the person designated

as being Responsible for Insurance Distribution. Throughout the Relevant Period,

Mr Hofstetter was approved to perform the CF1 (Director), CF8 (Apportionment

and Oversight), CF10 (Compliance Oversight), CF21 (Investment Adviser) and

CF30 (Customer) functions at IFM, and as the person with Responsibility for

Insurance Mediation. IFM had another director approved by the Authority to carry

out various functions, who only practised in areas of IFM’s business not involving

Pension Transfer advice. Mr Hofstetter and the other director are and were

throughout the Relevant Period the only directors of IFM, and Mr Hofstetter is the

sole person with significant control over IFM, owning at least 75% of its shares.

4.4.
Mr Hofstetter and Mr Cobill were the only people at IFM who were approved to

perform the CF30 (Customer) controlled function during the Relevant Period. Mr

Cobill was the only Pension Transfer Specialist at IFM and gave almost all of the

advice to Pension Transfer customers during the Relevant Period. Mr Hofstetter

acted as an adviser in a small number of Pension Transfer cases but, because he

was not a qualified Pension Transfer Specialist, his advice was subject to checking

by Mr Cobill.

4.5.
Mr Cobill and Mr Hofstetter were supported by those working in IFM’s office.

4.6.
Mr Hofstetter was responsible for compliance oversight at IFM throughout the

Relevant Period and compliance support was provided by external consultants.

Pension transfers

4.7.
Pensions are a traditional and tax-efficient way of saving money for retirement.

The value of someone’s pension can have a significant impact on their quality of

life during retirement and, in some circumstances, may affect whether they can

afford to retire at all. Pensions are, in most cases, a primary resource for ensuring

financial stability in retirement. For some people, they are the only way of funding

retirement. Customers who engage authorised firms to provide them with advice

in relation to their pensions place significant trust in those providing the advice.

Where a financial adviser fails to conduct the affairs of their advice business in a

manner that is compliant with the Authority’s regulatory requirements, this

exposes their customers to a significant risk of harm.

4.8.
Pensions can be structured in a variety of ways. However, a DBPS is particularly

valuable because an employer sponsor carries the financial burden associated with

offering a secure, guaranteed income for life to members, which typically

increases each year in line with inflation. This is in contrast to, for example, a DC

pension scheme where employer and employee capital contributions are invested,

but the investment and mortality risk are borne by the member. The Authority

expects that for the majority of customers it is in their best interests to remain in

their DBPS because of the guarantees and protections it offers.

4.9.
It is possible to “transfer out” of a Defined Benefit Pension Scheme. This involves

the scheme member giving up the guaranteed benefits associated with

membership in exchange for a CETV, which is typically then invested in a defined

contribution pension. Given the valuable benefits offered by Defined Benefit

Pension Schemes, the Authority considers that a firm should only recommend a

transfer if it can clearly demonstrate, based on contemporaneous evidence, that

a transfer is in the customer’s best interests.

4.10.
Customers who engage advisers and authorised firms to provide them with advice

in relation to their pensions place significant trust in them. It is important that

firms and their advisers exercise due skill, care and diligence when advising

customers regarding the transfer of their pensions, ensuring that the advice given

to a customer is suitable for them, having regard to all of the relevant

circumstances. This is even more important when customers have no option but

to make a decision regarding their pension.

4.11.
Transferring out of a DBPS involves giving up the guaranteed benefits in exchange

for a cash-equivalent transfer value which is typically invested in a DC pension. If

a customer leaves a DBPS, they will have to buy an annuity to obtain a guaranteed

level of income. Alternatively, they may rely on income from investments, but

investments will have to be managed in such a way as to produce ongoing income;

and even then, there is no guarantee as to the amount or duration of that income.

4.12.
The introduction of pensions freedoms (introduced in April 2015) for DC pensions

made transferring out of a DBPS an attractive option for some people. However,

the Authority considers that, given the nature of the guaranteed benefits provided

under a DBPS, advisers’ default assumption should be that transferring out and

giving up those benefits is unlikely to be suitable for a customer unless they can

clearly show, based on a customer’s specific circumstances, that it is in their best

interests.

4.13.
During the Relevant Period, IFM advised 307 customers on potential transfers

from a DBPS to an alternative pension arrangement, 231 (75%) of whom were

members of the BSPS. Notwithstanding FCA guidance which created a

presumption against advising a customer to transfer out of their DBPS, 261 out of

307 (85%), of its Pension Transfer customers were advised by IFM to transfer.

The proportion of IFM’s BSPS customers advised to transfer was even greater –

206 out of 231 (89%). IFM advised its BSPS customers to transfer out CETVs with

a total value of more than £93 million and with an average value of more than

£455,000. At least 198 out of 206 (96%) of those BSPS customers followed IFM’s

advice and transferred out.

The BSPS

4.14.
The BSPS was one of the largest DBPSs in the UK, with approximately 125,000

members and £15 billion in assets as at 30 June 2017. In March 2017, the BSPS

was closed to future accruals, which meant that no new members could join it and

existing members could no longer build up their benefits. The BSPS also had an

ongoing funding deficit.

4.15.
In early 2016, various options were being explored in relation to the BSPS as a

result of insolvency concerns relating to one of its sponsoring employers. These

options included seeking legislative changes which would have allowed pension

increases available under the BSPS to be reduced to the statutory minimum levels,

and the sale of one of the sponsoring employers. However, it was concluded that

the only way to avoid insolvency would be to enter into a Regulated Apportionment

Arrangement (“RAA”).

4.16.
On 11 August 2017, the Pensions Regulator gave its clearance for the RAA. Under

the RAA, the BSPS would receive £550 million and a 33% equity stake in one of

the sponsoring employers and the BSPS would transfer into the PPF. In addition,

a new DPBS (“BSPS 2”) was proposed by the sponsoring employers in combination

with the RAA proposal. The RAA received formal approval on 11 September 2017,

which resulted in the BSPS being separated from the sponsoring employers.

4.17.
As a consequence of the RAA, members of the BSPS were required to make a

choice about two options offered by the scheme, namely to either:

(a)
remain in the BSPS and therefore move into the PPF; or

(b)
transfer their benefits into BSPS 2.

4.18.
Alternatively, BSPS members could take a CETV and transfer their pension

benefits into an alternative pension arrangement (for example a personal pension

scheme or another occupational pension scheme held by the member).

4.19.
On 11 and 21 September 2017, the BSPS announced that it would separate from

the sponsoring employers, including the principal sponsor, Tata Steel UK.

Information about the options available to members was available on the BSPS’s

website from 11 August 2017, and in October 2017, the BSPS distributed

information packs to members about these options. Members were required to

choose their preferred option by 22 December 2017. Those who wanted to transfer

their pension benefits from the BSPS to a personal pension scheme were required

to submit the required paperwork to execute the transfer by 16 February 2018.

4.20.
The Rookes Review, an independent review of the support given to BSPS members

during restructuring and ‘Time to Choose’, stated that BSPS members

experienced, and were influenced by, a set of unique circumstances. These

included the following:

(a)
distrust of their employer;

(b)
limited information on alternative options;

(c)
tight timescales to make a decision; and

(d)
limited support.

4.21.
Some BSPS members were in vulnerable circumstances. For example, BSPS

members tended to have no other assets and relied more on income from their

DBPS than members of other schemes.

IFM’s Pension Transfer advice business and Mr Hofstetter’s role

4.22.
Before enquiries from BSPS members started to come in to IFM in mid-2017,

Pension Transfer advice made up a less significant proportion of IFM’s business

and revenue. In the period of nearly two years from 8 June 2015 to 1 April 2017,

IFM advised on only 56 Pension Transfers.

4.23.
Throughout the Relevant Period, IFM had no written description of its advice

process for Pension Transfer advice and maintained very little documentation of

any form relating to its advice process or the oversight of that process. IFM’s

written policies and procedures were high-level and lacked specificity. In ensuring

that its processes were compliant, IFM was heavily reliant on the experience and

expertise of Mr Cobill. The absence of effective oversight resulted in Mr Cobill

adopting a process which failed to ensure that all necessary information was

gathered from customers; that suitable advice was provided; and that customers

were afforded sufficient time to consider the advice to transfer before making the

decision to do so.

4.24.
IFM’s Pension Transfer advice process before mid-2017 was described by Mr

Hofstetter as consisting of a series of steps. Once a customer had made contact,

there would be an initial conversation to discuss the matter in general terms. If

the customer wanted to take matters further, IFM would gather information about

the customer and about the ceding scheme, including the CETV. IFM would then

carry out a comparison between the ceding scheme and the proposed

arrangement (a TVAS). There would be further discussions or emails between IFM

and the customer to ensure that IFM had all the information it needed to advise.

4.25.
According to Mr Hofstetter, once all the information had been gathered, there

would normally be at least two, possibly three face-to-face meetings with the

customer. The first meeting would be for the purposes of gathering further

information; at the second meeting, the information gathered would be presented

and the advice would be given. IFM would then issue the customer’s Suitability

Report – a written summary and explanation of its advice – which would be drafted

by back-office staff. On Mr Hofstetter’s account, the Suitability Report would be

reviewed and signed off by Mr Cobill before being sent to the customer for their

consideration. However, as addressed in paragraph 4.42 below, there was no

system in place to ensure the review of Suitability Reports before they were

provided to customers and Mr Cobill accepted in interview that he did not review

every Suitability Report before it was provided to a customer.

4.26.
If IFM advised the customer to transfer their pension and the customer decided

to follow that advice, there would be a final meeting with the customer to complete

the documentation. IFM’s back-office staff would then check that all relevant

paperwork had been uploaded to its electronic file and would submit the necessary

applications to the ceding scheme and the new provider.

4.27.
IFM operated a contingent charging model for the Pension Transfer advice it

provided, meaning that a customer paid for IFM’s advice only if the customer

transferred their DBPS following IFM’s recommendation. If IFM advised the

customer not to transfer, it received no fee. The fee charged was typically 3% or

4% of the customer’s CETV and was paid out of the customer’s transferred funds,

in addition to a £250 fixed fee for the initial set up.

4.28.
In around March 2017, Mr Cobill was approached by an adviser at another

authorised firm with connections to the British Steel community but without the

capacity to advise BSPS members on Pension Transfers. IFM and the other firm

agreed that IFM would accept introductions from the other firm of BSPS customers

who were interested in receiving advice on transferring out of their DBPS. Under

the arrangement between the two firms, the other firm provided only the

customer’s contact details directly to Mr Cobill. No other information was provided

and no fee was payable by IFM or Mr Cobill in exchange for the introductions. This

was a voluntary and relatively informal arrangement; IFM was not bound to accept

every introduction that it received.

4.29.
In the second half of 2017, the other firm introduced significant numbers of BSPS

members seeking Pension Transfer advice to IFM. IFM began to take on Pension

Transfer advice customers in ever greater numbers, all of them with the same

ceding scheme – the BSPS. This volume of new Pension Transfer business was

unprecedented in IFM’s experience. IFM altered its charging structure for BSPS

customers. They were to be charged less than non-BSPS customers: IFM’s

contingent charging model was maintained but a cap of £5,000 was introduced.

4.30.
BSPS customers also went through an advice process different to that used by

IFM prior to mid-2017 (as described above). BSPS customers had fewer meetings

with IFM’s adviser. The two to three meetings were replaced by one or two and in

the majority of cases there was only one. IFM’s explanation for these changes is

that it considered that there was less work involved for IFM in advising BSPS

members, because the BSPS members all had the same ceding scheme and

because they had in many cases already obtained information, including their

CETV, from the scheme trustees.

4.31.
In September 2017, approximately six months after the first approach to IFM from

the other firm, that firm stopped referring customers to IFM. However, IFM

continued to acquire new BSPS Pension Transfer customers in significant numbers

through customer referrals.

Significant increase in the rate at which IFM gave Pension Transfer advice

4.32.
Having advised a customer on a Pension Transfer on average once every 10 days

or so before the BSPS introductions began, IFM quickly transitioned to working at

a much faster rate. During IFM’s busiest period of advising Pension Transfer

customers, the four months from August to November 2017 inclusive, it was

common for Mr Cobill to meet several BSPS customers per day to advise them on

transferring their pensions. There were 26 occasions on which he had three

meetings per day, 17 on which he had 4 meetings per day and 4 on which he had

five meetings per day. In this period, IFM met customers on 231 occasions and

made 208 Personal Recommendations over 87 working days, an average of

approximately 2.65 meetings and 2.39 recommendations per day. The vast

majority of those customers (87%) were advised to transfer out of the BSPS.

The effect of the increased workload on IFM and IFM’s response

4.33.
The increased volume of Pension Transfer advice inevitably meant a significant

increase in workload for everyone involved in giving that advice.

4.34.
Mr Hofstetter was aware that IFM was undertaking a significant volume of Pension

Transfer cases and that this was putting pressure on Mr Cobill and IFM’s back

office employees. However, Mr Hofstetter did very little to increase IFM’s

resources:

(a)
Mr Cobill remained IFM’s only Pension Transfer Specialist throughout its

busiest period of August to November 2017. Mr Hofstetter gave advice to

only eight BSPS Pension Transfer customers (out of a total of 231);

(b)
the only increase in staffing was in the form of an administrative assistant

engaged for one or two days a week over a two-week period;

(c)
the member of back-office staff whose job it was to draft the Suitability

Reports setting out IFM’s advice to its Pension Transfer customers also

experienced a significant increase in their workload, but their working

hours were not increased and Mr Hofstetter did nothing to assist them in

coping with the increased demands on their time; and

(d)
a number of Suitability Reports prepared for customers were left unsent

for a period of up to seven weeks (and were not sent out before the

customers signed their transfer documents), until a junior member of

office staff returned from an extended period of leave and identified this.

4.35.
Subsequently, IFM stopped accepting new Pension Transfer business in December

2017.

A compressed approach to Pension Transfer advice

4.36.
IFM dealt with the increased number of Pension Transfer customers by taking a

compressed approach to the advice process. For at least 70 out of the 206 (34%)

BSPS customers who were advised to transfer out, or just under 34%, IFM held

the first meeting with the customer, gathered the fact-find from them, made the

Personal Recommendation to them to transfer out of their DBPS and obtained the

customer’s signature on the BSPS discharge forms to effect the transfer, all on

the same day. In some cases, the customer signed the discharge forms for the

BSPS at the first meeting with IFM even before receiving the Personal

Recommendation to transfer.

4.37.
Mr Cobill asserted that obtaining signed transfer documents prior to issuing

Suitability Reports was an acceptable practice because customers could revoke

their agreement to transfer even after submission of the forms to the BSPS.

However, the practice of obtaining signed transfer forms at the first meeting

decreased the likelihood that customers would pay close attention to the Personal

Recommendation and make a considered decision based on the advice given. The

practice also suggests that Mr Cobill’s advice did not start from the correct

presumption that transferring out of the BSPS would not be in the customer’s best

interests.

4.38.
Mr Hofstetter accepted that for a customer to sign a fact find, receive a Personal

Recommendation and sign a discharge form on the same day was not acceptable

as it did not afford the customer sufficient time to consider the decision to transfer.

Mr Hofstetter was also aware that there had been a material increase in the

volume of Pension Transfer advice being given by Mr Cobill and that Mr Cobill was

advising significant numbers to transfer out of their DBPS. Mr Hofstetter described

this as “unusual” given the Authority’s presumption against a transfer being in the

best interests of customers (of which Mr Hofstetter was also aware). Mr Hofstetter

did not discuss this with Mr Cobill at the time.

Mr Hofstetter’s Responsibilities as IFM’s Compliance Officer

4.39.
It was important that IFM took appropriate steps to verify the quality of advice

being provided to customers. This included establishing and maintaining adequate

policies and procedures sufficient to ensure the Firm’s compliance with its

obligations under the regulatory system, including compliance with Pension

Transfer rules.

4.40.
As CF10 (Compliance Oversight), Mr Hofstetter had responsibility for oversight of

the Firm’s compliance with the Authority’s rules.

IFM’s compliance arrangements

4.41.
By way of compliance during the Relevant Period, IFM relied on the following: a

review of each customer file by administrative staff; informal discussions between

Mr Hofstetter and Mr Cobill; a two-monthly audit by Consultant A; and a twice-

yearly visit from Consultant B.

4.42.
These measures were inadequate to ensure that IFM gave compliant Pension

Transfer advice.

(a) The administrative review of the file was limited to establishing that the

relevant documents were present on the customer file. The New Business

Submission Checklist completed by IFM’s administrative staff included as

one of the items “Fully completed Fact Finds – with notes explaining advice

rationale”. However, the review was conducted by administrative staff who

were not qualified advisers or compliance experts and could therefore not

be expected properly to assess the content of the material on the file. These

checks were therefore of very limited effectiveness.

(b) There were no regular compliance checks by IFM on the advice given by Mr

Cobill. The only step taken by Mr Hofstetter as CF10 to check the compliance

of Mr Cobill’s advice was to hold ad hoc and informal discussions. The

Authority has seen no evidence of these discussions and considers that, if

they did take place, they were infrequent – particularly in the busy period

August to December 2017. IFM had no system in place to ensure that

regular, systematic and documented checks were undertaken on the advice

given by Mr Cobill based on detailed file reviews. Mr Hofstetter was not a

qualified Pension Transfer Specialist, which meant that he could not assess

the suitability of advice, but Mr Hofstetter failed to undertake any kind of

meaningful check on the advice given by Mr Cobill. Even if unable to assess

the suitability of advice, compliance checks could have identified issues such

as the failure to prepare TVAS Reports, failure to gather information about

customers, and inaccuracies in Suitability Reports.

(c) Suitability Reports were prepared by a member of back-office staff. IFM did

not require Mr Cobill (or any other person) to review Suitability Reports

before they were sent to customers. The absence of any review led to

inaccuracies in Suitability Reports that were not corrected. Moreover, IFM

had no systems in place to ensure that, where inaccuracies in reports were

identified, these were corrected.

(d) Furthermore, IFM had no system to ensure that Suitability Reports and the

transfer analysis were provided to customers in a timely manner and in

accordance with the requirements of COBS. As set out at paragraph 4.95

below, many customers received their Suitability Report only following a

substantial delay and in some cases after the discharge forms required to

effect transfer had been submitted to BSPS.

(e) IFM was subject to two-monthly audits by Consultant A. However, the

Authority has seen no evidence to suggest that the consultant was a Pension

Transfer Specialist. Moreover, the consultant was not required by IFM to

conduct file reviews on every occasion. Rather, file reviews were conducted

“at random”; there was no agreed number or frequency of file reviews. No

Pension Transfer advice was reviewed during the Relevant Period and,

during the busy period August-November 2017, no file reviews were carried

out by this consultant at all.

4.43.
Consultant B conducted six-monthly reviews. She was not specifically required by

IFM to review the suitability of advice provided and was not, as far as Mr Hofstetter

was aware, a Pension Transfer Specialist. She only conducted one review during

the Relevant Period between August to October 2017, as she was first instructed

in 2017.

4.44.
Prior to April 2017, IFM advised on Pension Transfer cases on average once every

ten
days.
Between
August
and
November
2017,
this
rose
to
2.39

recommendations per day. Despite the risk posed by the significant increase in

Pension Transfer advice, Mr Hofstetter took no steps to increase the frequency or

rigour of its existing oversight mechanisms. Where issues did emerge, they were

not dealt with appropriately by Mr Hofstetter.

(a)
As set out at paragraph 4.23 above, IFM lacked any policies or procedures

governing its advice process or the oversight of that process. This led to Mr

Cobill adopting the compressed advice process without challenge, which Mr

Hofstetter latterly acknowledged was unacceptable.

(b)
Mr Hofstetter failed properly to monitor the volume of Pension Transfer

advice being given by Mr Cobill and consider the risks arising from this.

(c)
The administrative member of staff with responsibility for drafting Suitability

Reports received no additional oversight between August and November

2017 despite the significant increase in his workload. Mr Hofstetter made

informal enquiries regarding the wellbeing of this member of staff, but no

thorough assessment was undertaken of this person’s capacity and whether

it would allow for Suitability Reports to be prepared in compliance with the

regulatory requirements.

(d)
Mr Hofstetter said in interview that he would expect an adviser to read

suitability reports before they were provided to customers. However, he did

not have in place a system to make sure this was the case and acknowledged

that, given the volume of work, it was unlikely Mr Cobill reviewed all the

reports produced. Mr Cobill accepted in interview with the Authority that he

read only a “tiny proportion” of Suitability Reports issued to BSPS customers

prepared by the member of staff. This gave rise to the risk that Suitability

Reports sent to customers were inaccurate, a risk that in fact crystallised.

(e)
IFM took no steps to contact BSPS customers who had received Suitability

Reports containing materially incorrect information regarding early

retirement in the PPF. Further detail regarding this issue is set out at

paragraphs 4.87 to 4.89 below.

(f)
IFM did not seek an additional external compliance support or ensure that

the support it did receive addressed effectively the risks arising in relation

to the significant volume of Pension Transfer advice. During the busy period

of August to November 2017, no file reviews were carried out as part of its

two-monthly audits.

4.45.
During the busy period, IFM was visited by Consultant B as part of the twice-

yearly visits, who reviewed a BSPS Pension Transfer advice file from August 2017.

The consultant’s report, dated 7 October 2017, gave the file a rating of ‘unclear’

and set out various concerns, including: a lack of clarity in how the customer’s

risk tolerance was assessed; a lack of evidence that IFM had checked the

customer’s understanding of the complex area in which the advice was being

given; and the Suitability Report being issued by IFM after the recommendations

were completed. Mr Hofstetter asserted that this compliance report was shared

electronically with Mr Cobill, but that no further steps were taken to bring this to

Mr Cobill’s attention or to address the concerns identified in the report. Mr Cobill

claims not to have seen this report prior to the FCA’s Enforcement investigation.

The Authority’s review of IFM’s files

4.46.
The Authority reviewed a representative sample of 18 customer files of the

customers who were advised by IFM during the Relevant Period; 14 of the files in

the sample related to BSPS members and more than half were from IFM’s busiest

period of August to November 2017. The Authority assessed the files against the

applicable rules in COBS relating to suitability.

4.47.
The Authority found that in 15 out of 18 (83%) of the customer files it reviewed,

IFM failed to comply with relevant regulatory requirements regarding Pension

Transfer advice. All the files contained material information gaps and for six

customer files the Pension Transfer advice was unsuitable, as detailed further

below. The Authority considers it appropriate to infer from the prevalence of

failures within the sample that IFM failed to comply with relevant regulatory

requirements regarding Pension Transfer advice for a significant proportion of all

its Pension Transfer customers during the Relevant Period.

4.48.
The overarching suitability requirement, in COBS 9.2.1R, is for a firm to take

reasonable steps to ensure that a Personal Recommendation (which includes, in

this context, a recommendation to transfer or not to transfer a pension) is suitable

for its customer. To do so, a firm must obtain the necessary information regarding

the customer’s (a) knowledge and experience in the investment field relevant to

the pension transfer; (b) financial situation; and (c) investment objectives (COBS

9.2.1R(2)(b)). Making a Personal Recommendation without the necessary

information increases the risk of actually providing unsuitable advice.

4.49.
If a firm does not obtain the necessary information to assess suitability, it must

not make a Personal Recommendation (COBS 9.2.6R). The Authority’s review

revealed gaps in the necessary information recorded in 15 out of the 18 files

reviewed (83%). Therefore no Personal Recommendation should have been made

in these 15 cases.

4.50.
There was a pervasive failure, occurring in 13 out of 18 files, to obtain information

concerning the customer’s expenditure throughout retirement. There was also a

common failure, occurring in 14 out of 18 files, to obtain information about the

customer’s financial situation. Both areas are key in determining suitability.

Without such information, IFM should not have made a Personal Recommendation.

The customer’s expenditure in retirement is a key indicator of what their income

needs will be in retirement, information which is important in assessing whether

a customer should give up their defined benefits. Information about a customer’s

wider financial situation, including, for example, any other pensions that they may

have, is central to assessing the extent of their reliance on the income provided

by their DBPS, and their capacity for loss.

4.51.
An example of IFM’s failure to obtain the information necessary to advise can be

seen in the case of Mr B. Mr B was one of four BSPS Pension Transfer customers

seen by IFM during a single day, on 19 October 2017. He was one of two

customers seen on that day who signed his fact-find, received a Personal

Recommendation to transfer out of his Defined Benefit Pension Scheme and signed

his discharge forms to effect the transfer all on the same day. Mr B’s fact-find both

lacks information and contains conflicting information about Mr B’s liabilities and

expenditure. For example, the only item of monthly expenditure recorded is a

£600 mortgage payment and no other detail is recorded in relation to the

mortgage, despite the templated wording seeking these details. However, later on

in the document, a box next to the wording, “I have no mortgage but have a few

other obligations like credit card payments etc.” has been ticked. The notes page

of the fact-find is blank. There is a page of handwritten notes on the file which

merely records the information in the fact-find in summary form, with nothing

additional. IFM failed to obtain sufficient information in respect of Mr B to make a

Personal Recommendation.

4.52.
IFM failed to obtain sufficient information in respect of Mr B to make a Personal

Recommendation. The prevalence of information gaps in the 18 customer files

reviewed by the Authority shows that Mr B’s was not an isolated case. The

Authority considers it appropriate to infer from the prevalence of information gaps

within the sample of 18 customer files that for a significant proportion of IFM’s

other Pension Transfer customers during the Relevant Period, IFM did not obtain

the information necessary to make a Personal Recommendation.

4.53.
The prevalence of information gaps in the 18 customer files reviewed by the

Authority shows that Mr H’s was not an isolated case. The Authority considers it

appropriate to infer from the prevalence of information gaps within the sample of

18 customer files that for a significant proportion of IFM’s other Pension Transfer

customers during the Relevant Period, IFM did not obtain the information

necessary to make a Personal Recommendation.

Explanations given for the gaps in the customer information on file

4.54.
IFM’s position is that necessary information was obtained from customers in every

case, even if the information was not recorded on the customer file. However, IFM

staff members gave differing explanations to the Authority regarding the gaps in

customer information on file. Mr Cobill asserted that he recorded customer

information in notes which were placed on the customer file, but that these had

not been scanned by administrative staff and had subsequently disappeared. Mr

Hofstetter and a member of the back-office staff disagree with Mr Cobill’s account,

asserting that all hard copy notes on the customer files were scanned prior to the

paper files being destroyed.

4.55.
Having carefully considered all of the evidence on this issue, the Authority accepts

that IFM may in some cases have obtained, but failed to record, some information

in addition to that which is recorded in the customer files. However, the Authority

does not accept that all of the necessary information was obtained in every

customer’s case or that IFM took reasonable steps to ensure the suitability of its

advice to each of its customers.

Unsuitable Pension Transfer advice

4.56.
The overarching suitability requirement (COBS 9.2.1R) is for a firm to take

reasonable steps to ensure that a personal recommendation (which includes, in

this context, a recommendation to transfer or not to transfer a pension) is suitable

for its customer.

4.57.
The starting point for Pension Transfer advice is the guidance in COBS 19.1.6G(3)

(or, from 8 June 2015 to 1 April 2018, in COBS 19.1.6G) that a firm should only

consider a transfer, conversion or opt-out to be suitable if it can clearly

demonstrate, on contemporary evidence, that the transfer, conversion or opt-out

is in the customer’s best interests. These provisions indicate that if the firm cannot

clearly demonstrate this, then it should assume the transaction will not be

suitable. In the worst scenarios, a loss of guaranteed benefits equates to severe

customer harm, surrendering a primary resource for ensuring financial stability in

retirement or, alternatively, commencing retirement.

4.58.
Of the fifteen customer files where IFM had failed to gather sufficient information,

the Authority has been able to assess six as giving unsuitable advice. All six of the

customers who received unsuitable advice were BSPS members. According to their

fact-finds, all six customers were still employed in the steel industry, with above

average earnings and significant CETVs, reflecting significant safeguarded benefits

due to them through their membership of the BSPS. None of them had other

assets or investments of any significance and they had little or no knowledge or

experience of financial services or investing.

Reliance on the Defined Benefit Scheme and Inability to Bear Transfer Risk

4.59.
Five of the six customers for whom the Pension Transfer advice was unsuitable

were reliant on their DBPS to meet their income needs throughout retirement.

Their DBPS pension was their primary source of income in retirement. These

customers did not have significant assets which could be used to supplement any

shortfalls in their income needs. Given their financial situation, it was especially

important for these customers to retain guaranteed income because they did not

have the capacity to bear the risks of transferring. In all five cases, IFM

recommended transfer away from the defined benefit scheme when there was

insufficient evidence to suggest that the customer could bear the transfer risk.

IFM’s advice to transfer out exposed their customers to a risk of not being able to

meet their income needs throughout retirement because their income would be

dependent on the performance of the recommended investment. IFM did not have

a reasonable basis for believing that those customers could financially bear any

investment risks related to the Pension Transfers recommended in their cases.

Lack of evidence to support the customer objectives

4.60.
IFM failed to provide sufficient evidence to demonstrate that specific objectives

which drove the transfer were in the customer’s best interests. This was seen in

all 6 cases assessed by the Authority as being unsuitable for transfer.

4.61.
As the primary purpose of a pension is to meet the income needs of an individual

in retirement, when maximising the customer’s death benefits or the flexibility of

alternative arrangements is treated as a high priority, there is an increased risk

that this is at the expense of the primary purpose. There may therefore be a trade-

off that must be resolved in the best interests of the customer given their

circumstances (COBS 9.2.1R(1) and 9.2.2R(1)(b)). The file reviews uncovered

examples of where this tension was resolved in favour of transfer, but where the

Firm did not demonstrate why this was the case.

4.62.
All but one of the Suitability Reports for BSPS customers reviewed by the Authority

used identical language to describe the customers’ primary objective as providing

greater flexibility when drawing benefits from their pension funds, suggesting a

heavily templated approach and failure properly to explore customers’ objectives.

In all six files where unsuitable Pension Transfer Advice was given, IFM failed to

demonstrate that maximising flexible benefits was in the customer’s best

interests. There was either no evidence in support of the need to access funds

flexibly or insufficient evidence that to do so was in the customer’s best interests.

4.63.
Other objectives indicated by customers on the fact-finds had no supporting

explanation or facts recorded. It was therefore unclear on what basis IFM had

recommended the transfers. An example is provided by the file of Mr C. Mr C was

53 years old and anticipated retiring at age 60. Having no source of retirement

income other than the BSPS and the state pension, he was reliant on the income

provided by the BSPS in retirement. He had no mortgage and his current income

needs were relatively low, with no reason for them to increase in retirement.

Accordingly, taking into account early retirement factors, BSPS 2 might have

provided him with retirement income adequate to his needs, with minimal risk. He

had no need for a PCLS at retirement and his preferred type of death benefit was

a pension.

4.64.
Mr C was a cautious investor. The Authority’s guidance provides that a transfer

should only be considered suitable where it can clearly be demonstrated, on the

basis of contemporary evidence, that the transfer is in the customer’s best

interests. Moreover, the Authority’s rules require that there is a reasonable basis

for believing that a recommendation meets a customer’s investment objectives.

Given Mr C’s attitude to risk, the risks inherent in a decision to transfer out of a

DBPS and the lack of strong drivers to transfer in his case, the Authority would

expect to find evidence of a thorough explanation of how the recommended

transfer met Mr C’s objectives, including consideration of available alternatives to

transferring. However, the fact-find recorded nothing about his objectives beyond

ticking templated boxes; no further information or explanation was captured. The

Suitability Report contains only generic reasons, described using templated

wording.

4.65.
IFM did not have a reasonable basis for believing that the recommendation to

transfer met the customer’s investment objectives.

No basis for believing customers had necessary knowledge or experience to

understand the risks involved in the transfers

4.66.
Pursuant to COBS 9.2.2R(1)(c), IFM was obliged to obtain sufficient information

to provide a reasonable basis for believing that its customers had the necessary

experience and knowledge to understand the risks involved in the transfers. COBS

9.2.3R states that the information obtained had to include the types of service,

transaction and investments with which the customer was familiar, the nature,

volume and frequency of their investment decisions, and their level of education.

4.67.
The only information concerning the customer’s knowledge and experience

recorded in the six files assessed by the Authority where unsuitable Pension

Transfer advice was given took the form of the customer’s response to a single

tick-box, multiple choice question about their knowledge of financial decisions. In

two cases, the customers ticked the box describing themselves as having “Very

little understanding or knowledge” of financial decisions. In the other cases, where

the customer had asserted a level of knowledge when their occupation and

investments suggested this was not the case, there was no evidence of the adviser

challenging or scrutinising these answers on file. A general lack of knowledge and

experience could be inferred in all cases. Five out of six customers had worked for

the same employer for a substantial period of time and, apart from the benefits

available in their DBPS, all six customers had little in the way of other assets or

investments (save for their ongoing contributions to their employer’s group

pension plan and, in one case, an ISA). Further, there was no evidence of them

having previously taken financial advice and no evidence of their having any

knowledge of managing pension investments.

4.68.
IFM’s customers faced a difficult and very important decision concerning their

pensions in the context of the pensions’ significant value and a high level of

speculation about the future of the BSPS. The customers whose files were

reviewed by the Authority had limited knowledge and experience. Given the nature

of the customers, the type of transaction envisaged, and the risks involved, IFM

did not obtain sufficient information to provide it with a reasonable basis for

believing that its customers had the necessary experience and knowledge to

understand the risks involved in the transfer of their defined benefits.

Failure to consider attitude to transfer risk

4.69.
Pursuant to COBS 9.2.2R(1)(a), IFM was obliged to obtain information giving it a

reasonable basis for believing that its recommendation to transfer met the client’s

investment objectives. As part of that, IFM was obliged to obtain information on

the client’s preferences regarding risk taking and their risk profile, in accordance

with COBS 9.2.2R(2). IFM had to have a reasonable basis for believing that the

customer was prepared to take the risk involved in transferring out of their DBPS

– in particular, the risk involved in exchanging guaranteed benefits for non-

guaranteed benefits which are subject to investment risk borne by the customer.

4.70.
In three out of the six cases assessed where unsuitable Pension Transfer advice

was given (Mr B, Mr E and Mr W), there was no evidence that IFM had had a

reasonable basis for believing that its recommendation to transfer met the

customer’s objectives in the context of their attitude to risk. Customer files lack

evidence of discussions around risk, depletion of the fund and customer

responses/rationale as regards their views.

4.71.
By way of example, Mr W generally selected the most cautious responses available

in the fact-find, categorised himself as a ‘cautious risk’ investor and added

narrative comments on more than one occasion to emphasise the point, such as:

“I am quite a cautious person and require a stable income for my retirement which

will not exhaust and be able to support my wife when I die.”

4.72.
The Suitability Reports for Mr B, Mr E and Mr W make no reference to their

attitudes to risk. Instead, they all contain the following sentence, making use of

templated wording:

“As a result of our discussions, it became clear that you are attracted to

the flexibility of the personal pension and imagine this will suit your

retirement needs better than a fixed income for life. Equally, it is very

important to you that you are in control of your retirement provisions and

that you can draw benefits when you want rather than being bound by

scheme rules and trustee discretion. Ensuring your pension will not die

with you and allowing it to be fully inherited by your family is also a key

objective of yours.”

“Ultimately, the level of value placed on one aspect of a pension is down

to the individual. In other words, if an individual wants the peace of mind

from a guaranteed pension, then they will clearly place a high value on a

Scheme Pension.

From our discussions, it is clear that you place a higher value on having

choice and control over your pension fund than having a guaranteed

lifetime income.”

4.73.
The documentation on file provides no explanation of how the above conclusions

have been reached, in light of these customers’ attitude to risk as expressed in

their fact-finds. Mr B and Mr E did not complete the section of the Pension Review

Questionnaire which asked them to list their priorities in numerical order. Mr W

did complete this section and prioritised his three most important objectives as

follows: “1) Improve the security of my pension fund; 2) Ability to afford to retire

early; and 3) Flexibility and control of income in retirement.” He added a note

stating that he required a stable income for retirement. All three described

themselves as cautious investors who would tolerate only low volatility. Neither

Mr B nor Mr E mentioned leaving money to their family as an objective for them.

In the cases of Mr B and Mr E, insufficient information was recorded to justify the

conclusion that their desire for flexibility outweighed their cautious approaches to

risk. For Mr W, this conclusion was inconsistent with the objectives stated in his

questionnaire and insufficiently justified given his attitude to risk.

Transfer analysis not supportive of transfer or no transfer analysis

4.74.
In order to provide Pension Transfer advice in accordance with COBS 19.1.2R, IFM

was obliged to carry out a comparison between the benefits likely to be paid by

the ceding scheme with the benefits afforded by a personal pension. IFM further

had to ensure that the comparison included enough information for the client to

be able to make an informed decision and give the client a copy of the comparison,

drawing the client's attention to the factors that did and did not support its advice.

Finally, IFM had to take reasonable steps to ensure that the client understood its

comparison and its advice. This was important, given the limited knowledge and

experience of many of the customers in the sample. Where files did not

demonstrate that this was the case, there was a risk that the customer followed

the advice without understanding how the transfer compared with what they were

giving up.

4.75.
During the Relevant Period, this comparison would typically be contained in a

TVAS Report, and the TVAS Report would set out, amongst other things, a

comparison relating to specific benefits (for example, death benefits) and a critical

yield calculation. The critical yield is guidance on the level of return (expressed as

a percentage) that the customer’s investment will need to achieve up to the point

they start drawing from the pension to replicate the benefits they would receive

from their DBPS.

4.76.
In three of the files reviewed, the TVAS Report was not properly prepared, in that

it was not conducted on the basis of the client’s preferred retirement age or on

the basis of their stated intention to draw a PCLS. Where calculated to a higher

retirement age than desired by the customer, the critical yield figure will be lower,

suggesting the receiving fund does not need to perform as well. For example, in

the case of Mr H, the TVAS was prepared to the retirement age of 65 rather than

the preferred retirement age of 55. The critical yield calculated to age 55 is likely

to be much higher than that calculated to age 65. Moreover, the TVAS was not

prepared assuming Mr H took his PCLS, even though this is indicated as a

possibility in the suitability report.

4.77.
Further, in all six of the files assessed by the Authority where unsuitable Pension

Transfer advice was given, the transfer analysis did not support the Personal

Recommendation to transfer, in that the critical yield was greater than that

achievable for the particular customer in light of their attitude to investment risk.

For example, in the case of Mr W, the BSPS customer described above, the critical

yield obtained was 7.7%. The Authority considers that this return was unlikely to

be matched by investments consistent with Mr W’s extremely cautious attitude to

risk.

4.78.
In seven out of 14 (50%) of the BSPS files reviewed by the Authority, and three

out of six (50%) of the files assessed by the Authority where unsuitable Pension

Transfer advice was given, there was no TVAS Report in the customer file where

one was required. This omission occurred repeatedly throughout IFM’s BSPS

customer book. For 71 of the 206 BSPS customers (34%) for whom IFM made a

recommendation to transfer, IFM did not obtain a TVAS Report or otherwise carry

out the comparison required by the rules. In many cases (including that of Mr W),

the Suitability Report contained the following templated wording:

“Any comparison is made against the expected retirement income at 65

under the current scheme rules and benefits. Given we know these are to

change, the analysis will not represent a true picture and will arguably add

no value to the process. Moreover, as your intention behind transferring is

to take full advantage of pensions ‘freedom’ rather than purchase a lifetime

annuity in the future, the results of a TVAS are largely academic.

For your information however, I can confirm that our analysis to date of

the British Steel Scheme has shown that annual investment returns of

typically around 8.0% p.a. are required in order to match the benefits

available at 65 from the ‘current’ British Steel scheme. Given the terms

are due to change for the worse however, it follows that the required

growth rate to match the British Steel 2 scheme will be lower.” [emphasis

added]

4.79.
COBS 19.1.2R requires that Pension Transfer clients are provided with a TVAS

which contains sufficient information to enable them to make an informed

decision. Mr Cobill accepted that TVAS comparisons would always yield different

return figures for different customers. However, customers who were not provided

with a TVAS were given an imprecise and potentially inaccurate figure of a typical

annual return of 8%. Customers were entitled to receive a precise comparison,

taking into account their personal circumstances and evaluating the benefits of

the ceding scheme with those of the receiving scheme. Without such comparison,

customers were deprived of information which would have increased their level of

understanding in the decision-making process.

4.80.
Mr Hofstetter was aware that the Authority’s rules required the preparation of a

TVAS Report. He was also aware that, in respect of IFM’s BSPS customers, a TVAS

Report was not prepared in every case and yet he did nothing to address that

failure.

Compressed BSPS advice process exacerbated information gathering and advice

failings

4.81.
The 18 files reviewed by the Authority exemplify the compressed approach taken

by IFM to Pension Transfer advice in the latter part of 2017. Of the 14 BSPS

customers within the sample:

(a) all of them signed their BSPS discharge forms at their first meeting with

IFM;

(b) 12 (85%) had no further meetings with IFM; and

(c) six (42%) of them signed the fact-find, had their first and only meeting,

received their Personal Recommendation to transfer and signed the

discharge forms all on the same day.

4.82.
In interview, Mr Hofstetter described the process set out at paragraph 4.81(c)

above as “not acceptable” and “wholly inappropriate”. However, IFM had no policy

in place to prevent this compressed approach being adopted. There is a clear

connection between the reduced time afforded to customers and IFM’s failure to

obtain necessary information and its provision of unsuitable Pension Transfer

advice.

4.83.
Customer objectives were often recorded in a generic way suggesting a

standardised templated approach. In accordance with COBS 9.4.7R, IFM was

obliged to set out in the Suitability Report, as a minimum, the customer’s demands

and needs; why IFM had concluded that the transfer was suitable for the

customer; and any possible disadvantages of the transaction for the customer.

4.84.
The Suitability Reports reviewed by the Authority contained little evidence to

suggest that the stated objectives of the customers had been properly explored,

scrutinised and challenged by the adviser to ensure they were appropriate and

achievable, particularly the desire for flexibility. The underlying reason for the

customer objectives was not always recorded meaning the driver for transfer could

not be assessed; alternative means of achieving the aim or the appropriate

importance to attach to the objective cannot be evaluated.

4.85.
All apart from one of IFM’s Suitability Reports for BSPS customers reviewed by

the Authority gave in the first instance the customer’s sole objective as “Transfer

your defined benefit pension to a money purchase pension plan to provide greater

flexibility when drawing benefits from your pension fund”. In 9 out of 14 of these

Suitability Reports, the customer’s recorded objectives were substantively the

same. Moreover, 11 of the 14 BSPS Suitability Reports reviewed contained

identical reasons for the recommendation to transfer. In all 14 cases, the warnings

of possible disadvantages were identical.

4.86.
Mr Cobill sought to justify similarities in advice by reference to similarities in the

BSPS customers’ circumstances. However, the circumstances of every customer

were unique. The Suitability Reports failed to reflect these differences in sufficient

detail or to explain to customers how IFM had taken into account the information

provided by the customer in reaching the conclusion that the advice was suitable.

Important elements of the rationale for transfer were highly templated and the

Suitability Reports do not clearly communicate the reasons for IFM’s advice.

Incorrect information about the PPF given in Suitability Reports

4.87.
If BSPS members did not opt for BSPS 2 or transfer out of the BSPS, the default

outcome was to enter into the PPF and receive compensation in lieu of a pension.

Nine out of 14 Suitability Reports for BSPS customers reviewed by the Authority

contained incorrect information about the benefits available to BSPS members

entering into the PPF. Early retirement would always have been available as an

option for those BSPS members who went into the PPF. However, nine Suitability

Reports fused templated wording with incorrect information on that point, as

(a) in the first in time (advice given in July 2017) the report stated that on the

scheme entering the PPF, “the option of early retirement will be lost”;

(b) in the next six (advice given in August, September and October 2017) the

reports stated that “Early retirement is unlikely to be an option under the

PPF” (and stated that the terms of BSPS 2 in this context were as yet

unknown);

(c) in the next two (advice given in October and November 2017) the reports

stated that “Early retirement will not be an option under the PPF” (but stated

that it would under BSPS 2).

4.88.
Of the five remaining customer files reviewed by the Authority, one Suitability

Report does not address the customer’s stated concerns that early retirement may

not be available under the PPF, and the remaining four (all of which were prepared

in November and December 2017) correctly state that early retirement was an

option under the PPF. It appears from these four files that IFM corrected the

wording regarding the availability of early retirement in the PPF by at least early

November 2017 and, based on some IFM customer Suitability Reports obtained

by the Authority outside its file review exercise, it appears that some Suitability

Reports contained the correct information as early as September 2017. Regardless

of when exactly the error was realised, IFM allowed Suitability Reports containing

incorrect information to be provided to customers and did not subsequently write

to those customers to correct the position.

The materiality of the PPF issue

4.89.
Early retirement was a common objective among BSPS members. In that context,

for IFM to wrongly advise its BSPS customers at any stage in the advice process

that early retirement was either unavailable or unlikely to be available in the PPF

created a significant risk that members’ decisions to transfer out of their DBPS

would be made or maintained on a materially false basis. The mistake also had

the potential to make the riskier option of a Pension Transfer seem more attractive

than it might otherwise to cautious BSPS members. In some cases, the templated

Suitability Report wording on the point risked making it appear that the BSPS

member might not be able to retire early at all unless they transferred out of the

BSPS altogether. The Suitability Reports therefore failed to meet the requirements

of COBS 4.2.1R to be clear, fair and not misleading.

IFM’s provision of Suitability Reports to customers

4.90.
COBS 9.4.7R required the Suitability Reports prepared by IFM to, at a minimum,

specify the client’s demands and needs, explain why IFM had concluded that the

transaction recommended was suitable given the information provided by the

customer, and explain the possible disadvantages of the transaction for the

customer. Additionally, COBS 19.1.2R required IFM to prepare analysis comparing

the benefits likely to be paid under the customer’s DBPS with the benefits afforded

by a personal pension or other scheme recommended by IFM. That comparison

had to include enough information to enable the customer to make an informed

decision and IFM had to take reasonable steps to ensure the customer understood

the comparison and IFM’s advice. IFM was also required to give the customer a

copy of the comparison in good time and in any case no later than when the key

features document was provided, and therefore in good time before the sale of

the personal pension scheme.

4.91.
The Authority would expect a firm paying proper regard to the interests of its

customers to consider the purpose of the Suitability Report and the transfer

comparison required by the COBS rules, and to ensure that these are provided in

a timely manner so as to enable its customers to make an informed decision as to

whether to give up the benefits of their DBPS. This is consistent with the obligation

placed on firms by COBS 19.1.2R to take reasonable steps to ensure that their

customers understand any comparison provided and the firm’s advice.

4.92.
Contrary to this, in 184 out of 206 cases in which IFM recommended a transfer,

IFM provided customers with a Suitability Report after the forms to effect the

transfer were submitted to BSPS.

4.93.
Moreover, the Authority has not seen evidence to suggest that customers were

provided with TVAS Reports in their meetings with IFM. In any event, in 42 of the

184 cases there was either no TVAS prepared or the date of the TVAS is after any

meeting(s) that the customer had with IFM. This means that, in at least 42 cases,

customers made an irreversible decision to give up the benefits of their DBPS

without having been provided with their Suitability Report or the transfer

comparison required by the COBS rules.

4.94.
For example, Mr M received a Personal Recommendation to transfer at his first

and only meeting with Mr Cobill on 11 September 2017. IFM received a completed

fact find from Mr M at this meeting and Mr M signed the BSPS transfer documents

on the same date. Mr M’s transfer forms were submitted to BSPS on 19 September

2017. IFM prepared a TVAS Report and the Suitability Report for Mr M on 25

September 2017. However, Mr M was not provided with the Suitability Report until

22 November 2017, more than two months after his transfer forms were

submitted to BSPS. Mr M therefore made the decision to transfer out of his DBPS

based on one meeting with Mr Cobill.

4.95.
In 202 cases, customers received the Suitability Report after they had received a

Personal Recommendation and signed the discharge forms to effect the transfer

of their DBPS. Moreover, in some cases there was a substantial delay (of up to 20

weeks) between a customer receiving a Personal Recommendation and being

provided with a Suitability Report. The purpose of the Suitability Report is to

provide the customer with a clearly set out explanation of the Personal

Recommendation made by the adviser and the reasons for it, based on the

customer’s specific circumstances. The provision of Suitability Reports after

discharge forms had been signed risked customers not giving proper consideration

to the contents of the report.

Benefit derived by Mr Hofstetter

4.96.
IFM’s total revenue from DBPS transfer advice over the Relevant Period, both in

the form of initial charges to pension transfer customers and ongoing charges

levied on those customers for investment advice given after the customers had

transferred their pensions, was £1,502,400.61. This led to an annual increase in

turnover for IFM of approximately 150%, from £636,317 in the accounting period

2016-17 to £1,617,339 in the period 2017-18.

4.97.
IFM’s total revenue as at 31 July 2022 from the DBPS transfer advice it provided

during the Relevant Period was £1,911,121.20.

4.98.
During and after the Relevant Period, Mr Hofstetter derived direct financial benefit

from the Pension Transfer advice provided by IFM during the Relevant Period

which failed to comply with relevant regulatory requirements, through dividend

income totalling £52,182.

5.
FAILINGS

5.1.
The regulatory provisions relevant to this Notice are referred to in Annex A.

5.2.
The Authority considers that, during the Relevant Period, by reason of the matters

described in section 4 of this Notice, Mr Hofstetter breached Statement of Principle

7, in that he failed to take reasonable steps to ensure, in respect of his

performance of the CF1 (Director) and CF10 (Compliance Oversight) functions,

that IFM complied with Principles 3, 6 and 9 of the FCA’s Principles for Businesses,

and COBS 2.1.1R, 9.2.1R, 9.2.2R, 9.2.6R and 19.1.2R, as a result of the

deficiencies in the Firm’s Pension Transfer recommendations.

Statement of Principle 7

5.3.
Mr Hofstetter breached Statement of Principle 7, in that he failed to take

reasonable steps to ensure that:

(a) IFM obtained the necessary information about the customer, particularly

information concerning the customer’s financial situation, to be able to make

a suitable personal recommendation;

(b) IFM properly assessed, on the basis of the information obtained, or give due

consideration to, whether recommendation was suitable for the customer and

in their best interests, including:

(i)
that the customer could financially bear the risks involved in a Pension

Transfer;

(ii)
whether the Pension Transfer recommended met the customer’s

investment objectives;

(iii)
whether the customer had the appropriate experience and knowledge

to understand the risks involved in the Pension Transfer recommended;

and

(iv)
whether the transfer analysis supported a recommendation to transfer

out of the ceding scheme;

(c) any or any adequate transfer analysis (TVAS) was prepared for and explained

adequately to all customers comparing benefits likely to be paid under the

DBPS with the benefits afforded by the personal pension or other pension

scheme into which it was proposed that the customer should transfer;

(d) Suitability Reports and the transfer analysis required by the COBS rules were

provided to BSPS customers in a timely manner so that customers were

properly able to make an informed decision;

(e) Suitability Reports provided to BSPS customers were accurate and set out

clearly and adequately the reasons for the Personal Recommendation to

transfer; and

(f) IFM responded appropriately to the significant increase in the volume of

Pension Transfer advice given by Mr Cobill in the second half of 2017.

5.4.
The failures set out at paragraph 5.3 above resulted from Mr Hofstetter’s failure

to take the following reasonable steps:

(a) put in place adequate policies and procedures to govern IFM’s pension advice

process and the oversight of that process. Instead, Mr Hofstetter placed

excessive reliance on the expertise and experience of Mr Cobill as IFM’s sole

Pension Transfer Specialist in circumstances where IFM lacked capacity to

monitor or oversee the Pension Transfer advice he provided;

(b) ensure that Suitability Reports, that were prepared by a member of back-

office staff, were reviewed by the adviser or subject to compliance checks

before being issued to customers;

(c) ensure appropriate internal compliance checks (such as regular file reviews)

were conducted on the advice given by Mr Cobill;

(d) ensure that the Pension Transfer advice provided by Mr Cobill received

meaningful external scrutiny;

(e) assess properly the risks arising from the dramatic increase in the volume of

pension transfer advice provided by Mr Cobill in late 2017 (including the high

proportion of customers recommended to transfer) and take steps to address

those risks, such as putting in place additional compliance support; and

(f) respond appropriately to the file review conducted by an external compliance

consultant in October 2017 which identified issues with the Pension Transfer

advice given by Mr Cobill to one of IFM’s customers. Instead, IFM continued

to advise customers and generate income on the basis of a process which it

knew or should have known resulted in a significant risk that non-compliant

advice could be given.

5.5.
Each of these steps would have been reasonable ones for Mr Hofstetter to have

taken in the performance of his CF1 (Director) and CF10 (Compliance Oversight)

functions, to ensure that IFM complied with Principles 3, 6 and 9 of the FCA’s

Principles for Businesses and the relevant COBS rules.

5.6.
The Authority therefore considers that Mr Hofstetter is not fit and proper to

perform any senior management function or any function in relation to the

regulated activity of advising on Pension Transfers and Pension Opt Outs carried

on by an authorised person, exempt person and exempt professional firm.

6.
SANCTION

Financial penalty

6.1.
The Authority’s policy for imposing a financial penalty is set out in Chapter 6 of

DEPP. In respect of conduct occurring on or after 6 March 2010, the Authority

applies a five-step framework to determine the appropriate level of financial

penalty. DEPP 6.5B sets out the details of the five-step framework that applies in

respect of financial penalties imposed on individuals in non-market abuse cases.

Step 1: disgorgement

6.2.
Pursuant to DEPP 6.5B.1G, at Step 1 the Authority seeks to deprive an individual

of the financial benefit derived directly from the breach where it is practicable to

quantify this.

6.3.
Mr Hofstetter derived direct financial benefit through dividend income during and

after the Relevant Period from the initial charges levied by IFM for Pension

Transfer advice provided by the Firm during the Relevant Period, and from ongoing

charges levied by IFM for investment advice given after Pension Transfer

customers had transferred out of their DBPS. In calculating Mr Hofstetter’s direct

financial benefit from his breach, the Authority considers it appropriate to calculate

an amount reflective of the proportion of IFM’s customer files it identified during

its review where IFM failed to comply with relevant regulatory requirements

regarding Pension Transfer advice. This is £52,182.

6.4.
The Authority has charged interest on Mr Hofstetter’s benefits at 8% per year from

22 December 2017 to the date of this Notice, amounting to £25,973.77.

6.5.
Step 1 is therefore £78,155 (rounded down to the nearest £1).

Step 2: the seriousness of the breach

6.6.
Pursuant to DEPP 6.5B.2G, at Step 2 the Authority determines a figure that reflects

the seriousness of the breach. That figure is based on a percentage of the

individual’s relevant income. The individual’s relevant income is the gross amount

of all benefits received by the individual from the employment in connection with

which the breach occurred, and for the period of the breach.

6.7.
The period of Mr Hofstetter’s breach of Statement of Principle 7 was from 8 June

2015 to 22 December 2017. The Authority considers Mr Hofstetter’s relevant

income for the period of his breach to be £63,080.

6.8.
In deciding on the percentage of the relevant revenue that forms the basis of the

step 2 figure, the Authority considers the seriousness of the breach and chooses

a percentage between 0% and 40%. This range is divided into five fixed levels

which represent, on a sliding scale, the seriousness of the breach; the more

serious the breach, the higher the level. For penalties imposed on individuals in

non-market abuse cases there are the following five levels:

Level 1 – 0%

Level 2 – 10%

Level 3 – 20%

Level 4 – 30%

Level 5 – 40%

6.9.
In assessing the seriousness level, the Authority takes into account various factors

which reflect the impact and nature of the breach, and whether it was committed

deliberately or recklessly. DEPP 6.5B.2G(12) lists factors likely to be considered

‘level 4 or 5 factors’. Of these, the Authority considers the following factors to be

relevant.

Impact of the breach

6.10. Mr Hofstetter received a financial benefit of £52,182 from his breach of Statement

of Principle 7 (DEPP 6.5B.2G(8)(a)).

6.11. Mr Hofstetter’s breach of Statement of Principle 7 caused a significant risk of loss,

as a whole, to consumers who transferred out of their DBPS as a result of IFM’s

advice: IFM’s 307 Pension Transfer customers held pensions with CETVs totalling

more than £111 million, and IFM’s BSPS customers transferred out CETVs with a

total value of more than £93 million (DEPP 6.5B.2G(8)(b)).

6.12. Mr Hofstetter’s breach caused a significant risk of loss to individual consumers

who transferred out of their DBPS as a result of advice given to them by IFM. For

many customers, their DBPS was their most valuable asset (the average CETV

was £394,000 and for BSPS customers it was £455,000) and was their main

retirement provision (DEPP 6.5B.2G(8)(c)).

6.13. Mr Hofstetter’s breach affected particularly vulnerable people, namely BSPS

members, who made up the majority of IFM’s Pension Transfer advice customers

during the Relevant Period and many of whom were in a vulnerable position due

to the uncertainty surrounding the future of the BSPS (DEPP 6.5B.2G(8)(d)).

Nature of the breach

6.14. Mr Hofstetter’s breach was a continuous one committed over the course of more

than two years, in respect of many separate instances of Pension Transfer advice

(DEPP 6.5B.2G(9)(b)).

6.15. Mr Hofstetter is an experienced industry professional having worked in financial

services since 1994, working as an adviser and then setting up IFM in 2001. Mr

Hofstetter held senior management functions at IFM (DEPP 6.5B.2G(9)(j) and

(k)). As the Compliance Officer at IFM, who had responsibility for the compliance

process, he had significant responsibility for non-compliant advice issued by the

Firm (DEPP 6.5B.2G(9)(l)).

6.16. Although Mr Hofstetter took some steps to meet his responsibilities, these were

completely inadequate (DEPP 6.5B.2G(9)(n)).

Whether the breach was deliberate or reckless

6.17. Mr Hofstetter’s breach was committed as a result of his serious lack of competence

rather than deliberate or reckless acts (DEPP 6.5B.2G(13)(d)).

Level of seriousness

6.18. DEPP 6.5B.2G(12) lists factors likely to be considered ‘level 4 or 5 factors’. Of

these, the Authority considers to be relevant the fact that Mr Hofstetter’s breach

caused a significant risk of loss to individual customers who transferred out of

their DBPS as a result of IFM’s advice (DEPP 6.5B.2G(12)(a)).

6.19. DEPP 6.5B.2G(13) lists factors likely to be considered ‘level 1, 2 or 3 factors’. The

Authority considers relevant that Mr Hofstetter’s breach of Statement of Principle

7 was committed negligently (DEPP 6.5B.2G(13)(d)).

6.20. Taking all of these factors into account, the Authority considers the seriousness of

the breach to be level 4 and so the Step 2 figure is 30% of £63,080.

6.21. Step 2 is therefore £18,924.

Step 3: mitigating and aggravating factors

6.22. Pursuant to DEPP 6.5B.3G, at Step 3 the Authority may increase or decrease the

amount of the financial penalty arrived at after Step 2, but not including any

amount to be disgorged as set out in Step 1, to take into account factors which

aggravate or mitigate the breach.

6.23. The Authority has considered whether any of the mitigating or aggravating factors

listed in DEPP 6.5B.3G, or any other such factors, apply in this case and has

concluded that none applies to a material extent, such that the penalty ought to

be increased or decreased.

6.24. Step 3 is therefore £18,924.

Step 4: adjustment for deterrence

6.25. Pursuant to DEPP 6.5B.4G, if the Authority considers the figure arrived at after

Step 3 is insufficient to deter the individual who committed the breach, or others,

from committing further or similar breaches, then the Authority may increase the

penalty.

6.26. The Authority considers that the Step 3 figure of £18,924 does not represent a

sufficient deterrent to Mr Hofstetter and others, and so has increased the penalty

at Step 4. The Authority therefore has increased the Step 3 figure by a multiple

of four.

6.27. Step 4 is therefore £75,696.

Step 5: settlement discount

6.28. Pursuant to DEPP 6.5B.5G, if the Authority and the individual on whom a penalty

is to be imposed agree the amount of the financial penalty and other terms, DEPP

6.7 provides that the amount of the financial penalty which might otherwise have

been payable will be reduced to reflect the stage at which the Authority and the

firm reached agreement. The settlement discount does not apply to the

disgorgement of any benefit calculated at Step 1.

6.29. The Authority and Mr Hofstetter reached agreement at Stage 1 and so a 30%

discount applies to the Step 4 figure.

6.30. Step 5 is therefore £52,987.20. This is to be rounded down to £52,900.

Conclusion as to financial penalty

6.31. Having applied the five-step framework set out in DEPP, the appropriate level of

financial penalty to be imposed on Mr Hofstetter is £131,055.

6.32. The Authority would have imposed a financial penalty of £153,755 on

Mr Hofstetter (reduced to £131,055 as Mr Hofstetter agreed to settle at an early

stage of the Authority’s investigation and therefore qualified for a 30% (stage 1)

discount under the Authority’s executive settlement procedures). However, the

Authority recognises that there may be a significant liability for redress for IFM’s

customers which will likely fall to the FSCS. In these circumstances, the Authority

has agreed with Mr Hofstetter that in lieu of the imposition of a financial penalty,

the sum of £40,000 be paid direct to the FSCS to contribute towards any redress

due to IFM’s customers. This is in furtherance of the Authority’s consumer

protection objective. In light of the above and taking into account the exceptional

circumstances of the BSPS, the Authority hereby publishes a statement of Mr

Hofstetter’s misconduct.

6.33. The Authority’s policy in relation to the imposition of a public censure is set out in

Chapter 6 of DEPP. DEPP sets out non exhaustive factors that may be of particular

relevance in determining whether it is appropriate to issue a public censure rather

than impose a financial penalty. DEPP 6.4.2G (5) includes that it may be a factor

(depending on the nature and seriousness of the breach) in favour of a public

censure rather a financial penalty including but not limited to where a person has

taken steps to ensure that those who have suffered loss due to the breach are

fully compensated for those losses. Whilst the full amount of any losses due to Mr

Hofstetter’s breach is not yet quantified, they may be significant. In light of this,

the Authority has agreed that the sum of £40,000 should be paid direct to the

FSCS.

6.34. The Authority has had regard to the fact that Mr Hofstetter has agreed to pay

direct to the FSCS assets that would otherwise be used to satisfy any financial

penalty imposed by the Authority to be used towards any redress due to IFM’s

customers. On that basis, the Authority has not imposed a financial penalty on Mr

Hofstetter but instead hereby publishes on its website this Notice as a statement

of Mr Hofstetter’s misconduct under section 66 of the Act.

Prohibition Order and Withdrawal of Approval

6.35. The Authority has had regard to the guidance in Chapter 9 of EG in considering

whether to impose a prohibition order on Mr Hofstetter, and whether to withdraw

his approval in relation to his performance of the SMF3 (Executive Director) and

SMF16 (Compliance Oversight) functions at IFM. The Authority has the power to

prohibit individuals under section 56 of the Act and to withdraw an approval given

by the Authority in relation to the performance by a person of a function under

section 63 of the Act.

6.36. The Authority considers that it is appropriate and proportionate in all the

circumstances to withdraw Mr Hofstetter’s approval in relation to his performance

of the SMF3 (Executive Director) and SMF16 (Compliance Oversight) functions at

IFM, and also to prohibit Mr Hofstetter from performing the following functions

because he is not a fit and proper person to perform such functions due to his lack

of competence and capability:

(a) any senior management function in relation to any regulated activities carried

on by an authorised person, exempt person or exempt professional firm; and

(b) any function in relation to the regulated activity of advising on Pension

Transfers and Pension Opt Outs carried on by an authorised person, exempt

person and exempt professional firm.

7.
PROCEDURAL MATTERS

7.1.
This Notice is given to Mr Hofstetter and IFM under and in accordance with section

390 of the Act.

7.2.
The following statutory rights are important.

Decision maker

7.3.
The decision which gave rise to the obligation to give this Notice was made by the

Settlement Decision Makers.

7.4.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of

information about the matter to which this Notice relates. Under those provisions,

the Authority must publish such information about the matter to which this notice

relates as the Authority considers appropriate. The information may be published

in such manner as the Authority considers appropriate. However, the Authority

may not publish information if such publication would, in the opinion of the

Authority, be unfair to you or prejudicial to the interests of consumers or

detrimental to the stability of the UK financial system.

7.5.
The Authority intends to publish such information about the matter to which this

Final Notice relates as it considers appropriate.

Authority contacts

7.6.
For more information concerning this matter generally, contact Laurenz Maurer

(direct line: 020 7066 8096 / email: Laurenz.Maurer@fca.org.uk).

Financial Conduct Authority, Enforcement and Market Oversight Division

ANNEX A

RELEVANT STATUTORY AND REGULATORY PROVISIONS

1.
RELEVANT STATUTORY PROVISIONS

1.1.
The Authority’s statutory objectives, set out in section 1B(3) of the Act, include

the operational objective of securing an appropriate degree of protection for

consumers (section 1C).

1.2.
Section 56 of the Act provides that the Authority may make an order prohibiting

an individual from performing a specified function, any function falling within a

specified description or any function, if it appears to the Authority that that

individual is not a fit and proper person to perform functions in relation to a

regulated activity carried on by an authorised person, exempt person or a person

to whom, as a result of Part 20, the general prohibition does not apply in relation

to that activity. Such an order may relate to a specified regulated activity, any

regulated activity falling within a specified description, or all regulated activities.

1.3.
Section 63 of the Act provides that the Authority may withdraw an approval issued

under section 59 of the Act in relation to the performance by a person of a function

if the Authority considers that the person is not a fit and proper person to perform

the function. If the Authority decides to withdraw an approval, it must give each

of the interested parties a notice. Each interested party may refer the matter to

the Tribunal.

1.4.
Section 66 of the Act provides that the Authority may take action against a person

if it appears to the Authority that he is guilty of misconduct and the Authority is

satisfied that it is appropriate in all the circumstances to take action against him.

A person is guilty of misconduct if, while an approved person, he has failed to

comply with a statement of principle issued under section 64 of the Act, or has

been knowingly concerned in a contravention by a relevant authorised person of

a relevant requirement imposed on that authorised person.

2.
RELEVANT REGULATORY PROVISIONS

Principles for Businesses

2.1.
The Principles are a general statement of the fundamental obligations of firms

under the regulatory system and are set out in the Authority’s Handbook. They

derive their authority from the Authority’s rule-making powers set out in the Act.

2.2.
During the Relevant Period, Principle 3 stated:

“A firm must take reasonable care to organise and control its affairs responsibly

and effectively, with adequate risk management systems.”

2.3.
During the Relevant Period, Principle 6 stated:

“A firm must pay due regard to the interests of its customers and treat them

fairly”.

2.4.
During the Relevant Period, Principle 9 stated:

“A firm must take reasonable care to ensure the suitability of its advice and

discretionary decisions for any customer who is entitled to rely upon its

judgment.”

Statements of Principle and Code of Practice for Approval Persons


2.5.
The Authority’s Statements of Principle and Code of Practice for Approved Persons

(“APER”) have been issued under section 64 of the Act. The Code of Practice for

Approved Persons sets out descriptions of conduct which, in the opinion of the

Authority, do not comply with a Statement of Principle. It also sets out factors

which, in the Authority’s opinion, are to be taken into account in determining

whether an approved person’s conduct complies with a Statement of Principle.

2.6.
During the Relevant Period, Statement of Principle 7 stated:

“An approved person performing an accountable significant-influence function [or,

from 7 March 2016, “an accountable higher management function”] must take

reasonable steps to ensure that the business of the firm for which they are

responsible in their accountable function complies with the relevant requirements

and standards of the regulatory system.”

Conduct of Business Sourcebook

2.7.
The following rules and guidance in COBS (as were in place during the Relevant

Period) are relevant to assessing suitability of Pension Transfer advice given to

clients.

2.8.
COBS 2.1.1R states that a firm must act honestly, fairly and professionally in

accordance with the best interests of its client.

2.9.
COBS 4.2.1R(1) states that a firm must ensure that a communication or a financial

promotion is fair, clear and not misleading.

2.10. COBS 9.2.1R states that:

(1) A
firm
must
take
reasonable
steps
to
ensure
that
a
personal

recommendation, or a decision to trade, is suitable for its client.

(2) When making the personal recommendation or managing his investments,

the firm must obtain the necessary information regarding the client’s:

(a) knowledge and experience in the investment field relevant to the

specific type of designated investment or service;

(b) financial situation; and

(c) investment objectives;

so as to enable the firm to make the recommendation, or take the

decision, which is suitable for him.

2.11. COBS 9.2.2R (1) states that a firm must obtain from the client such information

as is necessary for the firm to understand the essential facts about him and have

a reasonable basis for believing, giving due consideration to the nature and extent

of the service provided, that the specific transaction to be recommended, or

entered into in the course of managing:

(a) meets his investment objectives;

(b) is such that he is able financially to bear any related investment risks

consistent with his investment objectives; and

(c) is such that he has the necessary experience and knowledge in order to

understand the risks involved in the transaction or in the management of his

portfolio.

2.12. COBS 9.2.2R (2) states that the information regarding the investment objectives

of a client must include, where relevant, information on the length of time for

which he wishes to hold the investment, his preferences regarding risk taking, his

risk profile, and the purposes of the investment.

2.13. COBS 9.2.2R(3) states that the information regarding the financial situation of a

client must include, where relevant, information on the source and extent of his

regular income, his assets, including liquid assets, investments and real property,

and his regular financial commitments.

2.14. COBS 9.2.3R states that the information regarding a client’s knowledge and

experience in the investment field includes, to the extent appropriate to the nature

of the client, the nature and extent of the service to be provided and the type of

product or transaction envisaged, including their complexity and the risks

involved, information on:

(1) the types of service, transaction and designated investment with which the

client is familiar;

(2) the nature, volume, frequency of the client’s transactions in designated

investments and the period over which they have been carried out;

(3) the level of education, profession or relevant former profession of the client.

2.15. COBS 9.2.6R states that if a firm does not obtain the necessary information to

assess suitability, it must not make a personal recommendation to the client or

take a decision to trade for him.

2.16. COBS 9.4.1R(4) states that a firm must provide a suitability report to a retail client

if the firm makes a personal recommendation to the client and the client enters

into a pension transfer, pension conversion or pension opt-out.

2.17. COBS 9.4.7R states that the suitability report must, at least:

(1) specify the client's demands and needs;

(2) explain why the firm has concluded that the recommended transaction is

suitable for the client having regard to the information provided by the client;

and

(3) explain any possible disadvantages of the transaction for the client.

2.18. COBS 19.1.1R states that if an individual who is not a pension transfer specialist

gives advice or a personal recommendation about a pension transfer, a pension

conversion or pension opt-out on a firm's behalf, the firm must ensure that the

recommendation or advice is checked by a pension transfer specialist.

2.19. COBS 19.1.2R states that a firm must:

(1) compare the benefits likely (on reasonable assumptions) to be paid under a

defined benefits pension scheme or other pension scheme with safeguarded

benefits with the benefits afforded by a personal pension scheme, stakeholder

pension scheme or other pension scheme with flexible benefits, before it

advises a retail client to transfer out of a defined benefits pension scheme or

other pension scheme with safeguarded benefits;

(2) ensure that that comparison includes enough information for the client to be

able to make an informed decision;

(3) give the client a copy of the comparison, drawing the client's attention to the

factors that do and do not support the firm's advice, in good time, and in any

case no later than when the key features document is provided; and

(4) take reasonable steps to ensure that the client understands the firm's

comparison and its advice.

2.20. COBS 19.1.3G explains the information that should be contained within a

comparison. In particular, the comparison should:

(1) take into account all of the retail client's relevant circumstances;

(2) have regard to the benefits and options available under the ceding scheme

and the effect of replacing them with the benefits and options under the

proposed scheme;

(3) explain the assumptions on which it is based and the rates of return that would

have to be achieved to replicate the benefits being given up;

(4) be illustrated on rates of return which take into account the likely expected

returns of the assets in which the retail client's funds will be invested; and

(5) where an immediate crystallisation of benefits is sought by the retail client

prior to the ceding scheme’s normal retirement age, compare the benefits

available from crystallisation at normal retirement age under that scheme.

2.21. COBS 19.1.6G states that when advising a client who is, or is eligible to be, a

member of a Defined Benefit Pension Scheme or other scheme with safeguarded

benefits whether to transfer, convert or opt-out, a firm should start by assuming

that a transfer, conversion or opt-out will not be suitable. A firm should only

consider a transfer, conversion or opt out to be suitable if it can clearly

demonstrate, on contemporary evidence, that the transfer, conversion or opt-out

is in the client’s best interests.

2.22. COBS 19.1.7G states that when a firm advises a retail client on a pension transfer,

pension conversion or pension opt-out, it should consider the client’s attitude to

risk including, where relevant, in relation to the rate of investment growth that

would have to be achieved to replicate the benefits being given up.

The Fit and Proper Test for Approved Persons

2.23. The part of the Authority’s Handbook entitled “The Fit and Proper Test for Approved

Persons” (“FIT”) sets out the criteria that the Authority will consider when

assessing the fitness and propriety of a candidate for a controlled function. FIT is

also relevant in assessing the continuing fitness and propriety of an approved

person.

2.24. FIT 1.3.1G states that the Authority will have regard to a number of factors when

assessing the fitness and propriety of a person. The most important considerations

will be the person’s honesty, integrity and reputation, competence and capability,

and financial soundness.

The Authority’s policy for exercising its power to make a prohibition order

2.25. The Authority’s policy in relation to prohibition orders is set out in Chapter 9 of the

Enforcement Guide (“EG”).

2.26. EG 9.1 states that the Authority may exercise this power where it considers that,

to achieve any of its regulatory objectives, it is appropriate either to prevent an

individual from performing any functions in relation to regulated activities or to

restrict the functions which he may perform.

DEPP

2.27. Chapter 6 of DEPP, which forms part of the Authority’s Handbook, sets out the

Authority’s statement of policy with respect to the imposition and amount of

financial penalties under the Act.

The Enforcement Guide

2.28. The Enforcement Guide sets out the Authority’s approach to exercising its main

enforcement powers under the Act.

2.29. Chapter 7 of the Enforcement Guide sets out the Authority’s approach to exercising

its power to impose a financial a penalty.