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FCA imposes 1% cap on early exit charges

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The FCA has decided to go ahead with plans to cap early exit charges on personal pensions for existing and new schemes.

The regulator has published a policy statement today which sets the cap at 1 per cent of the value of benefits being taken or transferred from existing contract-based personal pensions, including workplace personal pensions.

The cap will come into effect from 31 March. For existing schemes, early exit charges set below 1 per cent cannot be increased. New schemes entered into after 31 March cannot impose any kind of early exit charges.

The FCA first consulted on the proposals in May, following a separate paper from the Treasury on barriers to accessing pension freedoms.

FCA estimates suggest the charge cap could cost providers between £46m and £89m over four years.

Providers and industry respondents argue this is a “significant” underestimate as the cap will be in force beyond 2020, but the FCA says its cost benefit analysis remains valid.

Compliance costs to the industry are estimated at £17.4m, though again some respondents believe this to be an underestimate.

On the introduction of the cap, FCA executive director of strategy and competition Christopher Woolward says: “People eligible for the Government’s pension reforms should feel able to access them as they wish.

“The 1 per cent cap on early exit charges for existing pensions, and the 0 per cent cap for new contracts, will mean that current and future savers will not be deterred by these charges from accessing their pension pots.”

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Comments

There are 19 comments at the moment, we would lover to hear your opinion too.

  1. Compliance costs of £17.4m? Who’s in the compliance department, Ronaldo and Messi?

    Separate point – SJP claim this doesn’t effect them, which presumably means the exit fee is actually on the advice not the pension, but I think that puts them on a sticky wicket for enforcing it.

  2. Whilst the intention and outcome here might be focussed upon the apparent “better client outcome ” it is amazing that the regulator can, with the strike of a pen, re-write contracts that had within them charges representative of cost for the product provider. Yes that cost allowed for the product provider to make a profit – surely an essential component in the product providers strategy for business. The re-write will cost the product providers millions and this cost, one way or the other will filter down across the financial services industry, ultimately landing at – yes you guessed it – Joe Soaps from door!! The relaxation seen here may be considered as a cosy arrangement between the FCA and Government to remove barriers to accessing pension funds to accelerate the income tax take where the absence of the contract penalty deterred the investor from early exit. Altogether a smelly decision. It is impossible at any level to trust this industry

  3. Still does not deal with the problem whereby clients under 55 are stuck in old contracts with access to poorly performing funds and charges going back to an era when returns were much greater. Cynically I would ask what the FCA would do if the Government shouted about this unfortunate situation?

  4. They cannot be wiping out all existing penalties as this would do much greater damage to vulture insurers than the Poyntz Wright / Adamson debacle

  5. Whilst I understand the Governments bigger Pensions Freedoms picture, they are indeed messing with contract terms, which were often more preferential for the customer upfront – no initial charges (to cover commission) or higher allocation rates – and the providers are merely protecting themselves for the costs they have incurred upfront!! Perhaps the FCA should alos be looking at mortgage deal penalties in excess of 1% that still exist, to enable the mortgage companies to get back their costs and lost interest they have given away!!!

  6. In a word…….. competition !

    If the only ice cream in the window is vanilla…… guess what you will get….. yes vanilla !

    This is just the first step (if they the FCA and government are allowed to get away with this) to price fixing across the board !

    As Karl Marx said-: there is a specter haunting Europe, the specter of Communism

  7. @ Phil – SJP was the first model that sprung to my mind and I can’t see how they can (seemingly) bundle commission in the product costs and (post RDR) say it’s not commission (I guess it’s deemed to be a product charge) and then look to unbundle the exit penalty linked to the commission from the product charge and say it’s not a contractual exit penalty.

    I’ve not looked at an SJP plan for a while but a client I met recently explained they’d stopped funding their SJP PPP due to the fact any benefits drawn in the next 5 years from top ups would face penalties. Of couse, this may not actually be the case but it was the impression they had of their contact charges and penalties.

    Overall, this is good for the consumer but I agree with Mike Hurst that business which was priced decades ago is being ridden roughshod over and that’s a worrying precedent (albeit providers have done this to advisers with regard to recurring commission!).

    • Perhaps now Rory Percival has left the FCA, when get his explanation of SJP? Like you I agree with Mike Hirst. Disappointingley I think (the very few) of my clients who have plans with more than 1% penalties are under 55, so it will not benefit them much. I don’t like the charges, BUT these were the contract terms agreed at the time and rewriting contracts is a slippery slope to a command economy as DH says.

  8. If it is safe to say that a lot of these contracts are within with-profit funds, is it also safe to ‘assume’ that as a consequence of the changes, terminal (non-guaranteed bonuses) may be cut in order to reflect the ‘potential financial impact’ on the fund in some way (don’t ask me what financial impact there could be, other than a loss of some on-going revenue for the Provider!).

    Hope I am wrong but let’s see!

    • Unintended consequences of another ill-thought plan to pacify a vocal audience.

      This is effectively rewriting existing pension contracts, can that actually be done (whether it should be, or otherwise, is not really the issue)?

  9. And presumably the will, with an even handed approach, also be banning the governments early exit charge on a LISA…?

  10. God help Phoenix and ReAssure. This should be a lucrative time for the insurers lobbying firms

  11. It is lost on me why the product providers just suck it up. Why would they do that? So now we have a regulator re-writing contracts that when analysed and compared to post RDR contracts, are very low cost anyway if taken to retirement. Earlier comments apply re the Government and FCA seeking to make it easy for customers to access funds and accelerate tax take being funded then by the providers. Yes, with profits providers will simply adjust terminal bonuses or amend MVA calculations. It is a given that this is overall, wrong. Why is it even legal? But, add to this; the TRUTH that all IFAs are compelled to; follow Ombudsman led asset allocation expectations and that all IFAs spend their days comparing boxes of apples to make sure that a deal is cost competitive for a client – down to two decimal points – and we end up ultimately with investment model and cost outcomes being mandated by the regulator or his clumsy bodyguard the Ombudsman. Woe betide the IFA who designs something personal for their client that suits their client, that their clients assents to. The machine is running the show then now. Not the people who work with the clients, not the
    Clients and forgotten in all of it, whose money it is. The industry is so now flawed and overwhelmed with gravy train officialdom that it will almost certainly either cease to function as IT takes over and the next generation do DIY flow chart planning, or it will stagnate so that all apples look like each other and innovation dies in front of our eyes.

  12. So now the regulator can re-write contracts at will. Or can they? This is a seismic departure from the principle that the Law upholds contracts freely entered into. But who will dare challenge?

    But the regulator has made another daft mistake. They do not want to authorise the product, because they do not want to be accountable to anyone for anything. But this takes them another step nearer to just that point, which is where they should have got to years

  13. A law was passed requiring the FCA to do this so they are not doing this at will or within the powers that existed previously or going forward.

    Perhaps more interesting is the Treasury’s reasoning behind this, namely “…that significant numbers of individuals currently face early exit charges at a level that presents a ‘real barrier to accessing’ the freedoms.” Interesting, because the biggest exit charge of all is tax and it’s far bigger and more widespread than any product charges. Funny old world…

  14. Isn’t this just illogical? No penalties for new contracts, but the old ones can charge up to 1%. But these older ones have been going years. They have milked the clients for years and in addition either pay no bonuses on the old With Profits funds or have derisory investment performance in their unit linked funds (that still carry heavy charges).

    Notwithstanding Graeme Laws comment concerning re-writing contracts – they should go the whole hog and ban all transfer penalties and exit charges. After all their prime objective is supposed to be protecting the consumer.

  15. does this mean no 34.3% MVA’s from Phoenix

  16. If they ban MVR, will providers close their With Profits fund.

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