The Financial Conduct Authority (FCA) has banned the use of contingent charging in defined benefit (DB) transfer advice.
In a policy statement issued on Friday (5 June), the regulator said the ban will remove conflicts of interest that arise when a financial adviser only gets paid if a transfer goes ahead.
The FCA also said the ban would help "good advisers", who will often advise clients to stay put, to compete. It will come into effect from 1 October 2020.
The regulator said to address ongoing conflicts, advisers must now consider an available workplace pension as a receiving scheme for a transfer and, if they recommend an alternative solution, demonstrate why that alternative is more suitable. The regulator said it believed these measures would help reduce the need and costs for ongoing advice.
The FCA will also implement proposals allowing advisers to provide an abridged advice process which will help consumers access initial advice at a more affordable cost. The abridged process 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.
A ban on contingent charging has been on the cards since March 2018, when the FCA consulted on improving the quality of pension transfer advice. In October 2018, it delayed its decision, noting evidence did "not show that contingent charging is the main driver of poor outcomes".
However, in the latest consultation paper, published last summer, it revived the idea, stating contingent charging was "an obvious conflict of interest", and proposed just a specific group of customers with "certain identifiable circumstances" should face the charges.
Just days after the UK when into lockdown in March due to the coronavirus pandemic, the FCA postponed its final decision on whether to ban contingent charging, noting the revised handbook was due to be published in the second or third quarter of the year.
Scottish Widows head of policy Pete Glancy said: "While the FCA's announcement today seeks to remove any potential bias from the advice process, it highlights the urgency that's needed to tackle the barriers to financial advice.
"The key focus now needs to be on helping those who cannot afford to pay for financial advice, and are not financially sophisticated enough to be able to make complex decisions with confidence."
Details of the decision
The FCA said authorised firms were the group most likely to object to a ban on contingent charging, although it acknowledged there was some support within the industry for a ban too. However, it said those opposed to the introduction of a ban "did not provide any compelling evidence that an alternative approach would be more effective".
As for the "specific circumstances" where contingent charging will still be allowed when the ban comes into place, the FCA said these customers will have "certain identifiable circumstances". These are people who may be not be able to afford non-contingent advice charges and are more likely to benefit from receiving advice.
Specifically, the FCA said these vulnerable customers fall into two groups: "The first is those who have a specific illness or condition that causes a materially shortened life expectancy. The second is those who may be facing serious financial hardship such as, for example, losing their home because they are unable to make mortgage or rental payments."
However, the FCA added that those specific customers, who are an exception to the ban, should not pay any higher charges than those who do not pay contingent fees. The watchdog also said some firms have previously charged less for advice where the decision was not to transfer. Under new rules, however, firms will have to set a total cost for their DB advice.
In a bid to prevent a ban coming into place, a number of people told the FCA a ban would have some unintended consequences. These included:
• an increase in the proportion of recommended transfers, as advisers would be reluctant to give ‘advice to do nothing' when having to charge significant amounts
• conversely, others felt there would be a growth in the proportion of recommendations not to transfer as it would be ‘easy money'
• a potential growth in insistent clients who may feel they have the right to transfer, having paid for advice, resulting in more standalone advice firms and providers making these transfers for insistent clients
Some firms also questioned whether there should be extra rules for vertically integrated firms. They argued that such firms that only recommended their own products post-transfer had an extra layer of conflicts of interest. Respondents to the FCA's papers suggested they could game the rules by charging more for their products and less for the actual advice once a ban was in place.
In respone to those worries, the FCA said: "We agree that VIFs should not be allowed to cross-subsidise charges for pension transfer advice with product charges, and undercut other advice firms due to their business model. We consider both our existing rules and the rules implementing the ban on contingent charging prevent this."
The FCA's justification for a ban
As for why the FCA eventually decided to introduce a ban on contingent charging, it gave the following reasons:
• There is a clear conflict of interest in charging on a contingent basis for DB transfer advice where the only two outcomes are transfer or do not transfer
• There is a coincidence of advice to transfer and contingent charging: most advice results in a recommendation to transfer and most firms contingently charge
• Most consumers will not be materially harmed by remaining in their existing DB scheme if they choose not to take advice, and the carve outs mean there will only be a small number of consumers who are likely to benefit from a transfer but cannot afford advice
• As most consumers would not benefit from a transfer, the FCA expected the ban to be effective in reducing both the number of consumers who proceed to a transfer following advice and the harm that unsuitable transfers cause
• A ban places a value on advice itself rather than on a transaction so helps to enhance market integrity
• A ban prevents cross-subsidies by those who transfer and pay excessive amounts, with up to £10,000 not being untypical, for advice which is free or low cost to those who do not transfer
• In the current charging model, consumers do not recognise or weigh up the cost of transferring as it is dwarfed by the transfer value on offer and only deducted after the transfer has taken place
The regulator also revealed hundreds of firms had left the market since its probe began, and it was in the process of 30 enforcement investigations that arose as a result of its work.
Of the 745 firms that amended permissions as a result of the FCA's probe, 55 did so because they did not have appropriate professional indemnity cover in place.
The update showed the suitability of DB transfer advice has risen overall, but the FCA remained concerned by the number of files where the advice appeared unsuitable.
It said the suitability of advice given in the area had risen from 47% in previous years to 60% in 2018.
However, the FCA found nearly one in five files (17%) were still either unsuitable or had gaps in information. The regulator said this figure was still "unacceptably high".
Glancy added: "The ban on contingent charging will have a big impact on the DB advice market - we could see some firms exit the market and others consolidate. Advisers looking to stay in the DB advice space may benefit from signing up to the Personal Finance Society's Pension Transfer Gold Standard - it creates a point of differentiation, because making the effort to achieve this sends a clear signal that a firm will go the extra mile to do the right thing for its clients."
In 2018 the FCA sent firms a marketwide DB transfer survey, marking the final phase of the FCA's multi-firm supervision exercise on DB transfers.
A freedom of information (FOI) request sent by Professional Pensions' sister title Professional Adviser to the regulator earlier this year revealed some 3,026 firms were set to receive the questionnaire.
Writing to BSPS steelworkers
The FCA found there was a higher number of unsuitable files relating to advice given to members of the British Steel Pension Scheme (BSPS).
The financial watchdog reviewed BSPS files and found just one in five (21%) appeared to be suitable, while nearly half (47%) were unsuitable and a third (32%) appeared to contain information gaps.
As a result, the FCA will write to all 7,700 firms members for whom contact details are available and who transferred out, which it said would help them revisit the advice they received.
The Bank of England (BoE) is "ready to do more" to fight the economic consequences of the coronavirus pandemic and the measures put in place to tackle it, including further interest rate cuts and an expansion of its corporate financing facility, according...
Hymans Robertson has launched a segment identifier tool to help schemes meet The Pensions Regulator’s (TPR) expectations during the Covid-19 pandemic.
The Pensions Regulator (TPR) issued its 2020 Annual Funding Statement last month in the midst of the global Covid-19 crisis. Marian Elliott address some of the issues trustees will be facing when completing a valuation in this environment.
The Pension Regulator’s (TPR) Annual Funding Statement (AFS) is a fixture in the defined benefit (DB) pensions calendar but its arrival this year could not be against a more changed backdrop: new leaders for the two largest political parties, the country...
Stopped suitability of advice work