This picture of negligence and incompetence is even worse than suggested last week by the Securities and Investments Board, the senior financial regulator that is undertaking a full-scale review of the pension transfers market.
KPMG found evidence of suspect advice in 37 per cent of the 735 client files it looked at.
But most former employees had switched their company pension benefits to personal pensions without their advisers collecting adequate information about their financial position.
KPMG found that 83 per cent of transfers were arranged by sales people who had failed to gather sufficient information to meet 'know your customer' requirements. Only 9 per cent of clients seem to have had their pension transfer handled satisfactorily.
The results come more than five years after the existing system of investor protection was set up. The Financial Services Act created a series of self-regulating organisations whose boards are dominated by the representatives of the industries over which they watch.
Jean Eaglesham, head of money policy at the Consumers' Association, said the results of the study reinforced its belief that a move to a statutory system of investor protection was needed.
She said: 'If the pilot results are any indication of the overall position, there's a major scandal. It shows some of the fundamental flaws of the industry.
'There's a patent mix of incompetence and commission influence. It strengthens our view that there needs to be an overhaul of the remuneration system and of regulation.'
The pension transfer debacle has prompted the Treasury Select Committee to start a review of financial services regulation.
The KPMG study looked at financial companies belonging to Fimbra, the regulator of financial advisers, Lautro, which is responsible for life insurers, and the Investment Management Regulatory Organisation. Only minor differences existed between the standards demonstrated by their members.
Although the study did not look at bank and building society clients under SIB's protection, SIB said the institutions it regulates were equally unsatisfactory in their handling of pension transfers.
The full scale of the problem remains unclear because neither clients nor financial advisers were interviewed as part of the review. KPMG pointed out that bad record- keeping did not necessarily mean clients had received bad advice. Additional information might come to light that could support the recommendation to transfer.
But with more than half a million people having transferred their pension benefits, mainly into personal pensions, SIB believes the compensation cost will run into hundreds of millions of pounds.
KPMG found that standards of advice had improved modestly over the past 18 months since the regulators issued guidance on pension transfers.
Before the guidance, regulations were not followed in 95 per cent of the transfers handled by life insurers regulated by Lautro. Fimbra and Imro members did little better, with a failure rate of 89 per cent.
More recently, one in five transfers seem to have been properly conducted. Common problems were the advisers' failure to collect full details of the employee's old pension scheme or to make a full appraisal of all the alternatives.
Simon Walker, a KPMG partner, said one of the worst findings was that in 85 per cent of cases, the adviser's analysis was insufficiently rigorous for the customer to make an informed decision.
Prudential Corporation, the largest UK life insurer, said the results did not reflect the standards applied by its sales people. The model check list set out in the KPMG report 'accords very closely to the approach we adopt to pension transfers', a spokesman said.
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