The Financial Conduct Authority will ban contingent charging on DB pension transfers in the vast majority of cases.
This is the main plank of a part of a package of measures announced by the regulator to improve the pensions transfers market. This ban will come into effect on October 1 2020.
However this decision, which was widely expected, has caused a split within the industry, with some arguing it will limit access to advice for many, while others argue it could lead to better member outcomes by reducing the overall number of DB transfers.
Announcing this change in its policy statement, the regulator said that despite its previous intervention in the pension transfer market “the risk of harm from unsuitable advice remains unacceptably high.”
It said the measure outlined in this policy statement were designed to “improve the quality of future advice on DB transfers, reduce the incidence of bad advice, and so reduce the harm to consumers losing their guaranteed lifetime pension income and paying high fees when doing so.”
Contingent charging, where advisers only get paid if they recommend a transfer into a DC arrangement will only be allowed in a minority of cases, where for example a health conditios means an individual is not expected to live beyond the age of 75.
It will also be allowed when individuals can evidence they are in serious financial difficulties.
The rules also propose a new form of ‘abridged advice’ while will allow advisers to recommend clients not to transfer, without the cost of the whole process.
However the FCA said it wants firms to stop giving advice when delivering ‘triage service’. The new guidance will stop this practice almost immediately, with a ban coming in from June 15.
The FCA ahas also stipulated that when recommending a transfer, advisers must explain why the new pension is better than the current workplace pension of the customer.
Publishing this guidance the FCA said that evidence showed advice on 60 per cent of DB transfers was considered suitable, whereas advice given on 17 per cent of transfers is considered unsuitable.
This decision was welcomed by the Pension and Lifetime Savings Association. Craig Rimmer, Policy Lead: Master Trusts, PLSA, says: “The PLSA has consistently called for a ban on contingent charging. With its model of only paying the adviser if the pensions transfer goes ahead, contingent charging has been a perverse incentive that has resulted in far too many unsuitable DB transfers happening.
“With savers vulnerable to making hasty financial decisions during the uncertainty arising from the pandemic, our disappointment is that the ban is not happening even sooner. It would be better to raise the quality bar for pension transfer advice now rather than wait until 1 October.
“We support the FCA’s view that workplace pension should be considered first as a destination for any pension transfer – with generally lower charges and default investment strategies suitable for the majority of people they provide a straight-forward and affordable path for advised savers.”
Hargreaves Lansdown interim head of policy Nathan Long says: “This type of pension transfer are rarely sensible and the pressure had understandably been building to nullify a charging model that meant advisers only got paid if these transfers went ahead. The FCA has decided to give contingent charging the elbow in order to ensure the suitability of advice in this area improves. Our own analysis shows only 1 in 20 enquiries end up with a recommendation to transfer.
“There are plenty of high quality advisers, but they are dragged down by some poorer ones and as a result too much advice remains unsuitable.”
He points out that the FCA’s own research showed that almost half of the advice provided to people to transfer away from the British Steel Pension scheme was found to be unsuitable. “This is quite frankly a horror show reminiscent of the 1990s.”
However many of those working in the pensions industry expressed concern that this ban would lead to fewer people seeking advice on their pension options.
AJ Bell chief executive Andy Bell says: “Paraphrasing Plato, Good advisers do not need rules to tell them to act responsibly, while unscrupulous advisers will find a way around the rules.
“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.”
He argues this issue is particular critical at this time, with the funding of some DB schemes may be weakened by the coronavirus pandemic and subsequent economic lockdown. “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.”
Scottish Widows head of policy Pete Glancy says: “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. We believe 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.
“The ban on contingent charging will have a big impact on the Defined Benefit 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.”
Aegon’s pension director Steven Cameron says: ““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.”
It said in its own research, undertaken before the coronavirus crisis, an overwhelming 84 per cent of advisers said a ban on contingent charging would reduce access to advice.
He adds: “Some individuals simply can’t afford to pay upfront, even where transferring might have been in their interests, and with advice legally required ahead of transferring, the ban means some will be unable to explore their statutory right to transfer.
“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.”
LCP partner Steve Webb says: “The current Covid crisis could well lead to a surge in interest amongst the over 55s in accessing their DB pension.
“The need for affordable, high quality advice is likely to be greater than ever, and it is right to crack down on firms who have given poor quality advice.
“But forcing members to pay high upfront charges for advice will act as a barrier. For those who do find thousands of pounds up front for advice there is a risk that they will then be determined to go ahead with the transfer even if it is not in their best interests.
“Successful regulation would have left members with a wide choice of quality independent advisers. Instead, poor conduct by some advisers and poor regulation means that the DB transfer advice market is simply not working.”