The Financial Conduct Authority has confirmed that it will introduce a ban on contingent charging for pension transfers. Unless there are exceptional circumstances, advisers cannot use a fee-charging model under which they will only receive an advice fee if the transfer out of the occupational scheme goes ahead. Advisers must charge the same monetary amount for advice to transfer as for advice not to transfer.
The regulator says that the advice given by firms was suitable in 60% of the pension transfer cases it reviewed in 2018. While this is an improvement from the equivalent figure of 47% in a previous monitoring exercise, the fact that two out of every five transfer clients could have received incorrect advice has prompted the FCA to act. In the latest sample of advice files, the FCA says the advice was definitely unsuitable in 17% of cases, and that the remaining 23% of files did not contain enough evidence to justify the recommendation to transfer.
Looking specifically at clients who were advised to transfer out of the British Steel pension scheme, the FCA says that only one in five scheme members (21%) definitely received suitable advice. The advice was unclear in 32% of cases and was judged to be unsuitable for 47% of those advised to transfer.
The hope is that the ban on contingent charging will mean that unscrupulous advisers will no longer recommend a transfer simply because they can receive remuneration by doing so. The FCA was also concerned about the transparency of fee disclosure as if the fee is paid from the transferred funds, the charges may not be obvious to many consumers.
The FCA has instructed a number of firms to pay redress to clients who received unsuitable advice. The regulator’s enforcement division is also investigating 30 firms as a result of concerns identified during its pension transfer monitoring.
The new rules allow firms to use an approach known as ‘abridged advice’. For a smaller fee, the adviser could carry out a limited assessment to determine if a transfer would be in the client’s interest. The adviser would then carry out one of these steps:
- Make a personal recommendation to the client not to transfer their pension
- Inform the client that it is unclear whether or not they would benefit from a transfer. The adviser would then ask the client whether they wish to proceed to full advice, where a larger fee could be charged
The ‘abridged advice’ system can be used from June 15 2020. The contingent charging ban itself comes into force on October 1 this year.
The main exceptions to the ban are:
- Clients who have a specific illness or condition that means they have a materially shortened life expectancy
- Clients experiencing financial hardship, such as losing their home because they are unable to make the mortgage or rental payments
These customers can still be charged on a contingent basis.
In addition to the contingent charging ban, the FCA’s new rules mean that advisers will also need to consider whether it is appropriate to transfer their client’s pension pot to an available workplace pension. If the adviser recommends a transfer to a personal pension arrangement, then the file must justify why the personal pension is more suitable than the workplace pension.
Another new requirement is that firms must produce a one-page summary, limited to one side of A4, at the front of all transfer suitability reports. This summary must include:
- Details of all charges, including ongoing advice charges
- The adviser’s recommendation, i.e. whether the consumer should transfer their pension
- A statement of the risks of the pension transfer or pension conversion
- Details of whether any ongoing service will be provided
FCA interim chief executive Christopher Woolard said:
“The proportion of clients who have been advised to transfer out of their DB pension is unacceptably high. While much of the advice we looked at was suitable, we are still finding too many cases in which transfers were not in the client’s best interests.
“What we have set out today builds on the work we have been doing and reflects our determination to improve standards in this market. Clients need to have confidence that the advice they are receiving is right for them. The steps we are announcing today will drive up standards.”
Steve Webb, Pensions Minister in the 2010-15 coalition government, suggested that the FCA’s ban could lead some clients to opt to go ahead with a transfer, even if their adviser recommended that they should not 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 of the facts, circumstances or legal position may change after publication of the article.