Despite opposition from some firms and trade associations, the Financial Conduct Authority (FCA) is pressing ahead with plans to outlaw contingent charging on defined benefit pension transfers. A formal consultation paper outlining these proposals was issued in late July 2019.
Contingent charging is where the adviser would only be paid if a transaction was completed, so if the adviser did not recommend a transfer then no fee from the client would be payable. The FCA says that fees are typically between 2% and 3% of the amount being transferred.
Clearly this could lead to some advisers recommending a transfer simply to ensure they receive payment. The FCA has stated on a number of occasions that in most cases transfers out of final salary schemes will not be in the client’s best interests.
The regulator’s consultation not only bans contingent charging, but also requires firms to charge the same advice fee to all clients who complete the full advice process, regardless of whether a transfer is recommended at the end of the process.
The only exemption to the ban will be for groups of customers who are highly likely to receive a recommendation to transfer. It would include those who have a specific illness or condition which means they have shortened life expectancy and those who may be facing serious financial hardship such as losing their home, for instance due to not being able to make mortgage payments. The FCA says it expects that this exemption will only apply to a small proportion of clients.
The FCA has also proposed that where a transfer would lead to the adviser receiving ongoing fees in the years following the recommendation, the adviser will be required to demonstrate that the recommended pension arrangement is more suitable than the occupational scheme. Simply demonstrating that the recommended arrangement is equally suitable will not be sufficient.
A third proposal is to introduce an ‘abridged advice’ service, which is designed to address concerns that a charging ban will limit consumers’ access to advice. Under existing rules, banning contingent charging could give rise to a difficult situation whereby the customer is told at an early stage that the transfer would not be in their interests, but is then asked to pay a substantial fee from their own pocket. The FCA is therefore proposing that advisers can carry out a triage service, which can be used to filter out clients for whom it can be quickly identified that it is not in their interests to transfer. The adviser can then charge a reduced fee in these circumstances. Where this triage process identifies that the individual could possibly benefit from transferring out, the firm will then proceed to full advice, and will consider in more detail whether to recommend a transfer.
Abridged advice will still require a full fact find to be completed, and the advice must still be checked by a pension transfer specialist. There will be no requirement to produce a transfer value analysis in these circumstances.
Finally, the FCA proposes that all pension transfer specialists will be required to complete 15 hours of Continuing Professional Development (CPD) each year. These 15 hours must specifically relate to their pension transfer work and will need to be carried out in addition to any more general CPD.
The FCA invites responses to the consultation, which closes on October 30. Final rules are expected to be confirmed in February 2019.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA said:
“The FCA’s supervisory work has revealed continued problems in the pensions transfer advice market.
“By making changes to the way advisers are paid for transfer advice and the other changes to transfer advice we are proposing today, we want to ensure people receive suitable advice and drive down the number giving up valuable defined benefit pensions when it is not in their interests to do so.”
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