The new rules, including the ban on contingent charging, in FCA Policy Statement 20/6, come into effect next month and we are already starting to see advisers change their processes and pricing. While the Policy Statement is likely to have a long-term positive impact, those left in the market do face uncertainty over whether their interpretation of the rules aligns with that of the FCA, what their profit margin will be and how customers will react to the changes.
The FCA is quite rightly of the opinion that banning the practice whereby consumers only pay the majority of the cost for advice if and when a transfer proceeds will improve its quality.
But the new rules only apply from October and cases in train are allowed to use the current pricing structure for another five months. Trustees of DB schemes should be on heightened alert now and ensure their administrators are paying extra attention to any members where the receiving schemes for transfers are suspicious.
The most interesting fallout from the new rules will be what replaces contingent charging, especially now that advisers have the option now to offer ‘abridged advice’. To qualify as abridged advice, advisers can either make a personal recommendation not to transfer or inform the client that it is unclear whether or not they would benefit from a transfer based on the information collected. In the latter case, the adviser can then ask the client whether they would like to proceed to full advice.
Advisers are struggling both to determine what their abridged advice offering looks like and how much to charge. Firms have to predict how many clients will progress to the full advice stage and under or overestimating this will leave them thinking they could have priced more profitably. With no precedent to fall back on, we are seeing a significant variation in fees across the market. Indeed, during a recent tender for a Buck client, fewer than 50 per cent of the advisers that tendered were planning to offer abridged advice from the start of the contract. Furthermore, the most expensive abridged advice service cost 50 per cent more than the cheapest offering.
Also of interest was how much the cost of abridged advice was as a proportion of full advice, where abridged was taken as a first stage. Given the new rules are quite clear around what is included and not included in abridged advice, some firms are reflecting the amount of work in each stage more closely than others.
The market will calm down and find a natural norm, but in the meantime there will be winners and losers as firms take on less profitable cases and/or lose a share of the market due to aggressive pricing.
This is yet another challenge for those advisers who have a history of extremely high standards and who invest a lot of time and money into ensuring their advice is both suitable and compliant, with the clients’ best interests at heart. The FCA has also mandated that, if they advise transferring to another destination, IFAs provide evidence as to why a workplace scheme is not the appropriate destination for the transfer. This is unlikely to adversely affect good IFAs, who have likely already been conducting these assessments, but for others in the market it could be another obstacle to overcome.
Well-governed and well-priced workplace arrangements would appear to be the logical choice when considering where to place a pension transfer. However, some workplace arrangements do not allow IFAs to provide ongoing advice after a transfer takes place, meaning IFAs can’t get paid for any additional subsequent advice.
The new rules aim to remove this conflict by requiring that, after October, IFAs will have to provide evidence to support a transfer to something other than a workplace arrangement. This is another area where the Policy Statement should succeed in its aim, limiting this transfer activity to the few cases where it is appropriate and in the best interest of the member.
There is hope for the pension transfer advice market, although these changes may mean less access to advice for customers. That said, with some of the previous conflicts removed from advice and a cheaper initial stage to confirm if a transfer is not right for relevant members, the customer will be better off on receiving advice.
In the meantime, the remaining IFAs face uncertainty in implementing the changes needed and correctly defining their proposition and their pricing is key.
