RDR: FSA outlaws commission on GPPs in favour of 'consultancy charging'
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Commission on group personal pensions is to be outlawed by the FSA, which will require advisers to agree charges with employers under a process called ‘consultancy charging’.
Today’s FSA consultation paper, CP09/31, Delivering the Retail Distribution Review: Professionalism, Corporate Pensions, proposes an end to the current commission-based system of adviser and employee benefit consultant remuneration in the GPP market. The regulator says consultancy charging will apply regardless of whether the end investor, the employee, receives advice personally.
In the consultation paper consultancy charging replaces the concept of ‘arranger charging’, which was first mooted in CP09/18 earlier this year.
The FSA proposes that the adviser’s services could include advice to the employer on choosing a scheme provider, assistance in processing scheme actions, such as salary deductions or distributing key features and other documents to employees, as well as advice to employees – for example, about investment fund choices or contribution levels. Where an employee does not take up an offer of pre-arranged advice, no advice charge would be made.
The FSA says it was not swayed by arguments that there was no market failure in the group pensions sector, arguing that the “current commission-based market model is not sustainable. Those product providers offering initial commissions are subsidising these payments from their own funds, and, if scheme and member persistency levels continue to be poor, will not achieve economic returns on their GPP business.” The CP refers to group personal pensions, group stakeholders and group Sipps collectively as GPPs.
The FSA also argues that the fact that GPP new business is concentrated in a handful of providers that pay initial commission indicates that commission bias exists.
The FSA rejected suggestions that factoring of initial consultancy charges should be allowed, arguing that it would rather see a competitive market based on product terms and quality of service, and because it could infringe competition law. However, commission arrangements on existing GPPs already in place need not be disturbed.
The FSA will publish its policy statement and final rules implementing consultancy charging in the contract-based corporate pensions market in the third quarter of 2010, about six months after the main RDR adviser charging proposals, which relate to individual advice, which are expected in the first quarter of 2010.
Aviva has welcomed the principle of consultancy charging but is warning the FSA to carefully consider the differences in the GPP market to individual pensions.
Director of distribution development Steve Gay says: “We would caution that the group market is very different in purchase motivation and customer engagement to the individual market, and any changes need to take this into consideration.”
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Readers' comments (9)
Anonymous | 16 Dec 2009 12:23 pm
Surely the whole debate around commission and commission bias is anti competitive, it should be left up to the provider the adviser and the client to decide how much they get paid. As I remember we are all in business to make money (yes I know its obscene but its true) even those among us that apparantely only charge fees whilst maintaining our activities with £6ml in trail and renewals. Who decideds on the over inflated pay of those at the FSA, is it the FSA?
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How funny!! | 16 Dec 2009 12:25 pm
BRAIN DEAD!! (Well, we all knew that anyway!!)
HMGov are not exactly sending out the right message on pensions are they??
+ Pensions Simplification - simplification, ha, don't make me laugh!!
+ Personal A/cs - now delayed (doomed to failure, more like)
+ Restricted tax relief for high earners
+ Mooted raids on pensions/pension fund growth
With the current unstable economic environment, the people who need pensions advice the most (inc GPP members) are now gonna be left to rot ... ... sorry, left for the banks to pick up with mass-market useless products/service ... ...
Joy!!
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rick atkinson | 16 Dec 2009 12:32 pm
Well why not ban commission on everything, and kill the whole bloody advice industry stone dead in one go - as thats the aim isnt it.
Its just another nail in the coffin from those moronic government backed bank sponsored clowns at the FSA.
Unfortunately I, for one am not a charity. I have to earn in order to support myself and my family.
What's the point?
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Simon Webster | 16 Dec 2009 12:46 pm
So here we have it. The FSA, with all the pomposity of the truly incompetent, tells us that a market that has run well for decades on a commission based model "is not sustainable".
That is its opinion and as usual it is backed by precisly nothing and given their spectacular failure to predict any future event accuracy what the hell do they think they know?
The sooner theese dilussioanl self importnat bureacuctarts are replaced the better
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Anonymous | 16 Dec 2009 12:59 pm
Congratulations to the FSA. Not only has Labour's idiotic policy removed financial capability for those who need it most through personal accounts and means testing, but now the FSA have made retirement education and advice unviable for everyone else.
How long will it take for them to realise that employers and providers are not stupid, that a competitive market does exist, and that most employers would rather provide their staff with higher contributions and the capability to achieve their goals with professional education than nothing at all.
The effect of a 0.5% extra AMC to pay for advice has only a c.5% effect on the result.
Without advice 'reckless caution' over investment choices reduces it by c.30%.
Opting-out due to lack of education, 100%.
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Mahesh Dewan | 16 Dec 2009 3:11 pm
I understand the reasons why the FSA are taking this stance but there are some serious points that are not addressed:-
1. A significant proportion of the existing group Pension business is concentrated within a few providers but some of this is also due to providers withdrawing from the market place and consolidation within the industry. We as advisors could have challenged the FSA to the charge that this is due to commission bias if for example we had agreed the level of commission required with the sponsoring employer in advance of seeking terms from providers. After agreeing this (or even declaring this as a cost basis to the client employer) then asking providers to price their contracts in such a way as to provide this level of income. However I suspect that for some advisors the approach has been that they will ask for a level AMC and see who pays the most commission. Well that has to be commission bias, doesn't it?
2.In terms of the assertion that commission based pensions model is not sustainable. This seems to be inappropriate and perhaps we all should ask the FSA if they will also be challenging PADA on personal accounts. Even if this baby actually lifts off, it is probable that there will many, many , many years of Tax payer support for such a scheme. Now that doesn't sound like a "sustainable" business.
3. The biggest hurdle in Group Pensions is overcoming the inertia that exists from employees, even when there is an employer contribution, which auto enrolement may help overcome. However advice at that point is often the most important factor in making someone take positive action.
4. The whole concept of advice or non advised cases at the point of joining could be an unworkable model from an advisor / provider point of view and nigh on impossible to monitor.
Thats probably enough for now.
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SU | 16 Dec 2009 4:44 pm
So the Government says that employers, hit by recession, have to pay a set level of contribution into either Personal Accounts, make all the arrangements and absorb the costs of setting them up and then ,,, icing on the cake, they have to pay fees to the adviser whether they would prefer to work on a commission basis or not or leave their employees, the same employees that have made little effort to make employee contributions anyway, floundering when it comes to fund choice etc. For savvy highly paid companies and workers but for others, this is going to work how?
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Anonymous | 17 Dec 2009 10:08 am
It just makes you laugh!!
I'm waiting for exam result tommorrow morning not confident. I reckon IFA's are considered to be money making machines for the layers of do gooders who are failed advisers.
Client's don't like Fees so we will be doing even more work for nothing and employing extra staff to chase down the agreed client fees because they want the advice but don't really want to pay.
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John Davidson | 17 Dec 2009 4:38 pm
Now, now - the FSA has got a point. Extracting costs from a pension pot say for example by applying a stealth tax, could seriously erode the eventual pay out.
Seriously though, are the FSA not aware that millions of people no longer go to the dentist, beacuse they now have to pay?
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