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What impact the FCA’s contingent charging proposals on advice process?

11 August 2019

ATEB Consulting’s Steve Bailey assesses the FCA’s paper on contingent charging with regard to DB pensions transfers and what the proposals would mean for advice firms and paraplanners.

The FCA consultation paper CP19/25 covered a wide range of proposals that will have a significant impact on firms providing transfer advice, including that contingent charging on transfer advice should be banned.

Every firm advising on transfers should read this paper urgently and feed back to the consultation if they want their view to be heard. The Policy Statement will be published in the first quarter of 2020.

Below is a summary of the background to the paper and what is being proposed.

Background

The government’s pension freedoms gave consumers with defined contribution (DC) pensions more flexibility in how and when they could access their pension savings. The government created a mandatory advice requirement that was intended to prevent members of defined benefit (DB) schemes transferring against their own best interests.

The FCA has been consistent in its view that DB pensions are extremely valuable as they offer safeguarded, inflation-proofed lifetime income for them and their spouse. However, significant numbers of DB scheme members have transferred to DC schemes.

The FCA has conducted three thematic reviews since 2015 and has consistently found around half of the advice to be unsuitable. Given their starting perspective on the advantages of DB pensions, the FCA believes that the proportion of consumers advised to transfer is too high and that many of these transfers will not have been in consumers’ best interests.

Proposed remedies

The FCA is concerned that too many advisers are delivering poor advice, much of it driven by conflicts of interest in the way they are remunerated. In particular, the practice of contingent charging creates an obvious conflict. This is where advisers only get paid if a transfer proceeds. Accordingly, the regulator is consulting on the following proposals:

  • To ban contingent charging, except for groups of consumers with certain identifiable circumstances that mean a transfer is likely to be in their best interests;
  • Where contingent charging is permitted, advisers will have to charge the same amount, in monetary terms, for advice to transfer as they charge when the advice is non-contingent;
  • To introduce a short form of ’abridged’ advice that can result in a recommendation not to transfer based on a high-level assessment of a client’s circumstances. This will fall outside the proposed ban on contingent charging and should help maintain initial access to advice and should be able to be provided at lower cost;
  • To strengthen existing requirements that advisers giving pension transfer advice should consider an available workplace pension as a receiving scheme for a transfer where one is available. This is intended to address the conflicts of interest created by ongoing advice charges. It will also reduce the level of transfers involving unnecessarily complex and expensive solutions.

Non contingent charging

If implemented, the proposals will require firms to:

  • Not offset charges for advice on pension transfers and conversions against any other work they undertake for the client;
  • Not charge less in total for advice on pension transfers and conversions than if they provided and transacted investment advice for the same size of (non-pension transfer or conversion) investment. This is to prevent firms from gaming the ban by charging a token fee for initial advice. The FCA considers that advice on pension transfers and conversions is generally more complex than other investment advice, and so should typically cost the same or more than other investment advice;
  • Limit any subsequent ongoing adviser charges on funds that are transferred. They should do this so that the ongoing advice charges are no greater than if the funds had not been the subject of a DB pension transfer. This, together with the floor on initial advice charges above, is to limit the opportunity for cross-subsidies between initial and ongoing advice on transfers;
  • Charge for advice where any services related to full advice have been undertaken such as the appropriate pension transfer analysis and transfer value comparator

Exemption from the ban on contingent charging

To mitigate the effect of the interventions on those who cannot afford advice, some identified groups of customers for whom a transfer or conversion is likely to be in their best interests, due to specific personal circumstances will be exempt from the ban.

These groups will include those who have a specific illness or condition resulting in a materially 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.

Abridged advice

Abridged advice will act as a new mechanism to filter out those consumers for whom a pension transfer or conversion is unlikely to be suitable, before they pay for full advice. Where firms consider it appropriate, based on the client’s circumstances, to give abridged advice, it will enable them to provide a low-cost alternative to full advice.

BUT ABRIDGED ADVICE WILL ONLY BE ABLE TO RESULT IN A RECOMMENDATION TO RETAIN THE SCHEME BENEFITS OR CONVERT THOSE BENEFITS.

As it cannot result in a recommendation to transfer, conflicts of interest are reduced. Abridged advice must be carried out or checked by a PTS.

Improved Disclosure

There will be new enhanced initial disclosure requirements. This is to address the consistently poor quality of disclosure that has been seen from the thematic reviews.

In addition suitability reports will need to include a one page summary up front. This will summarise charges, key points of the recommendation, a list of the risks and a description of the ongoing advice option(s).

Clients will have to sign to indicate acceptance of each aspect. The draft rules include draft templates for the summary page.

Adviser/paraplanner CPD

The FCA proposes that Pension Transfer Specialists must undertake a minimum of 15 hours CPD each year, focused specifically on pension transfer advice. This would be in addition to any other existing CPD requirements for other types of advice. At least 5 hours of the 15 hours would have to be provided by resources external to any firm that employs or contracts services from the PTS. This is intended to ensure that a PTS is not just receiving a ‘house view’ of the market.

Other handbook / rule changes

Further proposed changes include:

  • clarifying and amending the TVC;
  • additional factors firms should incorporate in cashflow modelling (where used);
  • clarifying how the pension transfer rules should be applied to retirement annuity contracts;
  • how to use estimated transfer values for initial advice;
  • clarifying the application of adviser charges;
  • explaining the scope of arranging a transfer

Our view

It is clear that the regulator has been concerned about the transfer advice market for some time now. Rule changes in 2018 made some difference but the fundamental problems around the conflict of interest arising from contingent charging and the poor quality of advice has finally resulted in the far reaching proposals in this paper.

We agree that the quality of advice in this area requires strong measures and the contingent charging aspect is an obvious point of focus. However, there has to be a counterbalancing concern around the availability of advice to those who might struggle to pay a non-contingent fee. The proposals around abridged advice and the defined exemptions from non-contingent charging could address the advice gap concern. Only time will tell.

The FCA hopes that the new rules will discourage higher-risk firms from operating in this market. They also hope that high cost recommendations and high ongoing costs will disappear. A telling comment from the paper is:

“If firms believe they need to charge more for advice to transfer, due to the risk of it being unsuitable, they should be reconsidering whether they are competent to provide suitable pension transfer advice at all.”

There is also a hope that, just as their previous findings have influenced recent increases in PI costs, these proposals will result in less unsuitable advice and a consequent decrease in PI costs over time. We shall wait and see.