The Financial Conduct Authority will ban contingent charging on defined benefit transfers in a bid to crack down on “weaknesses” within the market but industry commentators warn it swaps one set of problems for another and doesn’t get to the heart of the issue.
In a policy update, the watchdog confirmed that a ban on contingent charging in all but exceptional circumstances (“carve-out”) will come into effect on October 1 2020.
According to the FCA, the move will reduce the conflicts of interest which arise where an adviser only gets paid if a transfer goes ahead and will “help good advisers, who often advise clients to stay put, to compete in the market”.
Clients who are considered an exception to the ban should not pay higher charges than those consumers whose transfer advice is charged on a non-contingent basis.
Under the new rules, the FCA said advisers must now consider an available workplace pension as a receiving scheme for a transfer and if they recommend an alternative solution, must demonstrate why that alternative is more suitable. It believes these measures will help to reduce the need and costs for ongoing advice.
Christopher Woolard, interim chief executive, FCA (pictured), said: “The proportion of customers who have been advised to transfer out of their DB scheme 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 customer’s best interests.
“Customers need to have confidence that the advice they are receiving is right for them. The steps we are announcing will drive up standards.”
Advisers will be able to provide an abridged advice process which is designed to help consumers access initial advice at a more affordable cost. However, it can only result in a recommendation not to transfer or a statement that it is unclear whether a consumer would benefit from a pension transfer without giving full advice.
Justin Corliss, senior pensions development and technical manager, Royal London, said: “The FCA’s decision to ban contingent charging does not come as a surprise even though there is no real evidence that it leads to poor outcomes.
“The exceptions to the contingent charging ban, the “carve-out”, will only cover a minority of cases, some people will still be left without access to affordable advice, but there is a feeling that this is the lesser of two evils. What is surprising though is that few stipulations have been made regarding ongoing adviser charges even though this is also a potential conflict of interest.”
Andy Bell, chief executive, AJ Bell, warned that the latest move would do little to help the pensions market, particularly amid the effects of Covid-19.
Bell said: “The FCA’s focus should be on making sure advice is tailored to the pension saver and delivered in a form that they can understand. Banning contingent charging swaps one set of problems for another and doesn’t get to the heart of the issue. Most importantly, DB transfers will now become an option only available to the wealthy.
“COVID-19 will see the failure of businesses, which in turn will weaken or bring down final salary pension schemes. Members of defined benefit schemes, no matter how wealthy, should be allowed to access their right to transfer.
“DB advice rules need a root and branch overhaul. Too much of the advice process involves trying to work out whether the transfer value on offer is good value for money. Frankly, this is a waste of time as there is an obligation on the ceding scheme actuary to certify that the transfer value fairly reflects the defined benefits being given up.”
Steven Cameron, pensions director, Aegon, said: “The FCA’s decision to ban contingent charging is no surprise but runs the real risk of further reducing access to advice on DB transfers at a time when the coronavirus pandemic arguably means for some individuals, this is needed more than ever. We fully support the FCA’s desire to ensure DB advice is of a consistently high quality, and reflective of the current uncertain environment.”
A recent survey carried out by Aegon found that 84% of advisers believed a ban on contingent charging would reduce access to advice, with some individuals unable to afford to pay upfront.
Cameron added: “Not all advisers support contingent charging and many do accept that it could create the potential for bias in recommendations. But it’s regrettable that the FCA and industry couldn’t have found a way of addressing this conflict of interest.
“Clarification on those individuals eligible for ‘carve outs’ from the ban are welcome and we hope this may alleviate the issues for some individuals. We may see an increase in the number of individuals eligible on grounds of serious financial difficulty as a result of the financial implications of COVID-19. We also support a carve out for those with life shortening medical conditions and welcome the move to allow this to be self-certified rather than requiring specific evidence from a medical professional.”
Suitability of advice
The FCA has also published an update to its ongoing supervisory work, looking at the advice firms have given clients seeking to transfer out of a DB scheme. Following an industry-wide data collection from over 3,000 firms, over 700 have since given up their permission to provide pension transfer advice.
While the suitability of advice has improved in recent years from 47% to 60% in 2018, the regulator said it remained concerned at the number of files which either appeared to be unsuitable or missing information.
