Adviser loses out at FOS over FSAVC switch advice

The Financial Ombudsman Service (FOS) has ruled against advisory firm Kellands Northern Ireland over a recommendation to transfer a free-standing additional voluntary contribution (FSAVC) pension to a personal pension plan. The main reason behind the FOS decision appears to be the high level of upfront charges on the new plan.

The rationale used by Kellands to justify its recommendation was that the new plan had a much wider range of funds – around 250 compared to just 14 in the FSAVC.

However, the firm intended to take an initial adviser charge that amounted to 50% of the new personal pension contributions, plus 4% of the amount being transferred. When an ongoing advice fee of 0.5% per year and fund charges of 1.92% are added, this amounts to charges in the first year of 56.14%. Even though the total charges would have reduced to 2.42% thereafter, the FOS still ruled that the first year charges were sufficiently large to make the recommendation inappropriate. The fact that the client was aged 55 and was thus fairly close to retirement may have had an impact on the FOS decision.

After Kellands appealed the initial decision of a FOS adjudicator to uphold the client’s complaint, the final decision fell to ombudsman Roy Milne.

Mr Milne’s judgement said:

“She wasn’t working at the time and the contributions were always likely to be relatively small. This was a small fund and the growth rate required to overcome the effect of charges would be quite high.

“In my view, the advice to start a new PPP was unsuitable. I think that the existing plan could have been continued. I agree with the adjudicator that a comparison of the existing FSAVC should be made with the new PPP.”

Kellands must now pay compensation of £7,342 to the client.

Financial Conduct Authority guidance says that no client should be recommended to switch a pension arrangement to another plan with higher charges unless there is good reason for this. Kellands presumably believed that the much greater fund choice available in the personal pension justified a recommendation to switch, however the FOS adjudicator and Mr Milne both disagreed.

Firms that try to justify pension switches on the basis of giving the client a much wider fund choice also need to consider whether the client would actually benefit from a wider choice, and whether they would use it. For example, a client who has always been content to have their pension invested in a generic managed type fund may not be attracted by the opportunity to invest in specialist areas such as emerging markets or technology.

Some within the industry have suggested that this judgement suggests the FOS is in effect becoming a price regulator. However, when the charges on a new plan are so high that the level of performance required to offset them becomes unachievable, then any recommendation to switch must be regarded as poor advice.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.