Advisers have been warned the FCA’s move to impose a 1 per cent cap on early exit charges for existing personal pensions is “dangerous” and paves the way for the FCA to act as a price regulator.
The regulator published a policy statement on Tuesday 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.
It follows a consultation by the FCA in May, and separate work by the Treasury. The FCA was given the duty to cap early exit charges by Parliament.
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 was given both the power and duty to cap early exit charges by Parliament after
EY senior adviser Malcolm Kerr says the 1 per cent cap on existing schemes sets a “dangerous precedent” for the FCA acting as a price regulator.
He says: “The FCA has consistently said it is not a price regulator and it is now regulating a price.
“Back in the day I helped design these products that had early exit charges built into them. The charges were simply a reflection of the amount of fees that you wouldn’t get if people didn’t keep the contract to the point they had agreed to keep it. Those penalties were clearly explained in the marketing collateral and the documents the clients received. What the FCA is now doing is rewriting those contracts.”
The 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.
Syndaxi Chartered Financial Planners managing director Robert Reid says: “If you look at it from the perspective of IT costs for the providers, it would have been cheaper to have no early exit charges. In fact, that would have been simpler overall. If the FCA wants to remove early exit charges it should just go ahead and remove them, and stop all this faffing about.”