The FCA has proposed a ban on contingent charging for defined benefit transfers in its latest attempt to stop unsuitable advice.
The decision to put forward a ban for consultation this morning marks a change of direction for the regulation, which had decided not to tighten the rules on contingent charging – under which advisers will receive higher fees for a particular course of action – in October.
The move had been backed by the likes of MPs on the work and pensions select committee.
The FCA now says it intends for a ban to apply “unless consumers have specific circumstances that mean a transfer is likely to be in their best interests”.
The regulator’s announcement reads: “The proposed ban on contingent charging is designed to protect customers from the conflicts of interest which arise where a financial adviser only gets paid if a transfer goes ahead. We have carefully considered the available evidence on the impact of banning contingent charging, including how we can maintain access to advice for those groups of consumers who would benefit from a transfer.”
The FCA notes that a causal link between unsuitable advice and contingent charging is “very difficult to prove statistically”, and that opponents of a ban maintain paying for advice to do nothing is not something consumers should have to do.
However. the FCA says it believes “suitable advice not to transfer is valuable as it
demonstrates the value of their membership of a DB scheme and protects them from a poor outcome”.
How the ban will work
Under the proposed new rules, the FCA will “require firms to charge the same amount for advice on pension transfers and conversions, irrespective of whether the advice results in a recommendation to transfer or not to transfer.”
It will apply across all advice and implementation charges, including for insistent clients, and also where multiple advisers are involved in the process.
The FCA’s draft rules – Advisers must…
• Not charge less in total for advice on pension transfers and conversions than if they provided and transacted investment advice for the same size of (non-pension transfer or conversion) investment. This is to prevent firms from gaming the [contingent charging] ban by charging a token fee for initial advice.
• Not offset charges for advice on pension transfers and conversions against any other work they undertake for the client.
• Limit any subsequent ongoing adviser charges on funds that are transferred. They should do this so that the ongoing advice charges are no greater than if the funds had not been the subject of a DB pension transfer. This, together with the floor on initial advice charges above, is to limit the opportunity for cross-subsidies between initial and ongoing advice on transfers.
• Charge for advice where any services related to full advice have been undertaken such as the appropriate pension transfer analysis and transfer value comparator.
The exemptions to the ban will be those with an illness or condition resulting in a materially shortened life expectancy and those who may be facing serious financial hardship such as losing their home.
Firms will have to get evidence from a doctor or in the form of bank statements, for example, to satisfy this condition, but it will not apply to those who simply cannot afford to pay for advice, as the FCA says this is a highly subjective criteria.
Some respondents to earlier consultation had claimed that more advisers were using contingent charging because if a fee was charged but the recommendation was not to transfer, this would become subject to VAT under the HM Revenue and Customs’ product intermediation exemption rules. FCA says it has confirmed with HMRC that the VAT exemption does not necessarily apply in either case, so should not be a driver to charge contingently in the future.
The path ahead
The contingent charging ban is among a number of remedies outlined this morning by the regulator.
These include a new requirement for advisers to demonstrate why any scheme they recommend a transfer into is more suitable that an existing workplace arrangement, to “address the conflicts of interest which arise where a financial adviser advising on a pension transfer stands to receive ongoing fees”.
It is also consulting on how an “abridged advice” regime could be introduced, allowing those customers who should not transfer to receive lower cost advice.
The consultation closes on 30 October.