Additional voluntary contribution schemes

From 29 April 1988 to May 1996, the relevant rules were issued from two regulators:

• Life Assurance and Unit Trust Regulatory Organisation (LAUTRO)
• Financial Intermediaries, Managers and Brokers Regulatory Association (FIMBRA)

The LAUTRO Code of Conduct stated that life assurance company representatives should:

• "have regard to the consumer's financial position generally and to any rights they may have under an occupational pension scheme
• "give the consumer all information relevant to their dealings with the representative in question"

That meant that if a life assurance company representative advised a consumer about a pension arrangement, they should have:

• pointed out that AVCs were available
• explained that AVCs were likely to provide better value for money
• recommended considering the AVC

The FIMBRA rules required a FIMBRA-regulated independent financial adviser to:

• know their client
• "not make a recommendation unless they believed, having carried out reasonable care in forming their belief, that no transaction in any other such investment (of which it ought reasonably to be aware) would be likely to secure the objectives of the consumer more advantageously"
• "take reasonable care to include in any recommendation to a person, other than a professional investor, sufficient information to provide that person with an adequate and reasonable basis for deciding whether to accept the recommendation"

Under FIMBRA rules, an independent financial adviser (IFA) should therefore have actively investigated an AVC if it was available and recommended it if it was better for the consumer.

In 1994, the Personal Investment Authority (PIA) took over from LAUTRO and FIMBRA, adopting their rules for sales of AVCs and FSAVCs.

In May 1996, the PIA issued Regulatory Update 20, which gave clarity on the requirements of tied and independent financial advisers. It said tied advisers should:

• draw the consumer's attention to the AVC plan
• discuss the generic differences between the FSAVC and AVC
• direct the consumer to their employer or the occupational pension scheme for more information on the AVC options

It also said that independent financial advisers should discuss the specific differences between AVC and FSAVC options with the consumer, including the:

• difference in charges and expenses between the FSAVC and AVC
• choice on investments
• availability of added years and the number of years that could be purchased
• degree of personal control and privacy
• age at which benefits could be taken
• degree of portability on changing jobs 

If you recommended an FSAVC after 29 April 1988, we’ll take into account the LAUTRO and FIMBRA requirements.

This means that if an AVC was available to a consumer, you should have told them about it and recommended that they consider it. If you're an IFA, you should have looked into the AVC on their behalf and recommended it if it was the better option.

If you're an IFA who recommended an FSAVC to a consumer, we won’t necessarily agree with the consumer’s complaint if we decide the FSAVC was suitable. This might be the case where, for example:

• the AVC alternative only offered a building society account investment, and the consumer wanted to have an equity-linked investment
• there’s clear evidence the consumer preferred a particular investment (for example, an ethical fund) that wasn’t available via the in-house AVC arrangement – and the consumer accepted this would involve higher charges than those for the AVC

IFAs sometimes tell us that FSAVC arrangements have other advantages, for example, that they’re confidential, flexible or portable – as reasons for recommending them. In these cases, we’ll look carefully at whether the consumer benefited from taking the FSAVC you recommended. We’ll take into account that:

• confidentiality, flexibility and portability are unlikely to be over-riding considerations for most consumers
• confidentiality is not in any case strictly maintained by an FSAVC, as the pension provider must always notify the consumer's workplace pension scheme that its scheme member has an FSAVC
• the charging structures of FSAVCs often make them inflexible, particularly in relation to certain types of AVC, because the consumer may receive poor value if they discontinue the policy early on
• although a consumer can continue an FSAVC in any new employment, the new employer may offer an AVC on advantageous terms – and certain types of AVC don’t impose punitive terms if a consumer has to discontinue one because of a change in employment

In all complaints where a consumer believes that you, as an IFA, should have advised them to take out a money purchase AVC instead of an FSAVC, we’ll look at whether you:

• clearly explained the advantages and disadvantages of FSAVCs and AVCs
• weighed the perceived advantages of the FSAVC against the clear material disadvantage of any higher charges

We believe cost is usually the most important consideration when consumers buy AVC schemes. If an FSAVC isn't significantly better for the consumer than a less expensive AVC , we may decide that the consumer would have taken out an AVC instead if you had given them suitable advice.

With this type of complaint, we’ll look at the consumer's circumstances at the time you gave them advice. We’ll consider whether they would have bought added years if you’d given them suitable advice. We'll take into account their:

• age
• future job prospects
• likely earnings increases
• attitude to risk

For example, we might decide that the consumer was less likely to benefit from added years if:

• they’re relatively young, since they’re more likely to be an early leaver
• they’d moved jobs regularly in the past – and had skills that were in high demand – so were more likely to be an early leaver
• they looked likely to have relatively low salary increases, based on their potential for career progression and earnings increases at the time of the advice
• evidence shows they wanted to take a higher risk for greater potential reward when investing, since money purchase AVCs and FSAVCs can involve more risk than added years

If a consumer has remained in a job and enjoyed good salary increases, it doesn’t necessarily mean you should have advised them to buy added years.

As well as the expense and inflexibility of an added years arrangement, we’ll consider whether it offered the consumer any additional benefits, such as dependents’ benefits.

Consumers can still make a specific complaint about an FSAVC, but they can't request a review under the FSAVC review as the deadline has passed.

Following concerns about pension mis-selling, the Financial Services Authority (FSA) required financial businesses to carry out a limited review of FSAVC policies sold between 29 April 1988 and 15 August 1999.

Consumers can still make a complaint about an FSAVC, but they can’t request a review under the FSAVC Review as the deadline has passed.