Today the FCA launched a consultation around banning contingent charging for defined benefit transfers.
Contingent charging is the process where advisers only get paid if a transfer proceeds. FCA suggest most consumers use contingent charging.
The FCA propose a package of measures including:
- Banning contingent charging for DB pension transfers and conversions, except for specific groups of consumers with certain identifiable circumstances
- Except for these exceptional cases, advice firms will have to charge the same amount, in monetary terms, for advice to transfer as they charge when the advice is non-contingent
- The requirement will incorporate all related and associated charges such as advice on where any transferred funds will be invested and implementation charges
- FCA sets out exceptions in its draft rules which includes those who have a specific illness or condition resulting in a materially shortened life expectancy, and those who may be facing serious financial hardship. These people may continue to be advised on a contingent basis.
- FCA reiterates any triage service should be purely educational
- Allow a short form of advice (abridged advice) which 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.
FCA still expects the adviser to conduct a full fact-find and risk assessment. However it means consumers may receive a recommendation not to transfer without an adviser having to collect detailed scheme data, undertaken an Appropriate Pension Transfer Analysis (APTA) or provide a Transfer Value Comparator (TVC).
Removing these elements from the advice process should enable abridged advice to be provided cost-effectively. This should help maintain initial access to advice FCA proposes the ban on contingent charging should come into effect within a week of the FCA Board making the final instrument, so this is likely to take place towards the end of this year.
Andrew Tully, Technical Director at Canada Life comments:
‘It is almost impossible to show a link between contingent charging and unsuitable advice. But advisers only being paid if a transfer proceeds creates a conflict of interest and a perception they may be more inclined to recommend a transfer.'
While it is right we have strong controls and scrutiny of transfers, we need to be careful not to demonise all transfers and those involved in them. Otherwise we run the risk of stopping people exercising control over their pension savings, and preventing some from achieving the best outcome.’
The FCA issued some market data around transfers from defined benefit schemes last month covering the period from April 2015 to September 2018 - find out more
This showed of those receiving advice 162,047 members (69%) had been recommended to transfer out, and 72,904 members (31%) had been recommended not to transfer. Across recommendations for and against transfer, the average transfer value was £352,303 equivalent to a total value advised upon of £82.8bn.
Read the Consultation Paper - runs until 30 October 2019