FCA sets out contingent charging ban for DB transfers

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.

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Comments

There are 24 comments at the moment, we would love to hear your opinion too.

  1. Christopher Wicks 30th July 2019 at 7:31 am

    The FCA themselves are conflicted. On the one hand they expect IFAs who have recommended a transfer to remain accountable (for ever) for the future investment outcomes of the transferred pension. On the other they are concerned that IFAs are conflicted by the fees for providing an ongoing service, designed to ensure transferred client do achieve good outcomes.
    For goodness sake, what is it that they are trying to achieve?

  2. Has any-one told the FCA that, HMS “DB transfer”, sailed some time ago and sunk recently due to PI cost and withdrawal ?

    I’m not sure a contingent charging ban is a remedy, more like a toddlers hurdle in a land full of giants

  3. David Bashforth 30th July 2019 at 9:50 am

    There is a rather obvious potential conflict, should this ban be implemented, in so much as that a mechanism is created where advisers will get paid regardless and, due to PI cost, open ended liability, and the FCAs biased starting position that transfers are unsuitable, a clear incentive to advise retain. Surely, by this constant tinkering, and creating inconsistencies between advice on different products and services, it is going to cause havoc further down the line. It also looks to be a series of knee jerk reactions as the regulator lurches from one position to the next. Surely all advice should be based on an unbiased assessment of a clients circumstances and objectives?

  4. Pretty much the end of access to financial advice on DB transfers for all but the rich. What adviser in their right mind would give advice when they are not able to charge ongoing advice fees and yet retain a lifetime obligation for the advice.

  5. RIP DB Advice

  6. All contingent charging should be banned – nothing other than commission by another name.

    The fee should be for the advice – whether or not that advice is taken. Does your lawyer or accountant waive their fee if you don’t proceed?

    • When someone goes to see a lawyer or accountant it’s 99% reactive not proactive….

      Ever you ever heard of someone saying to a lawyer ….um I’m going to get divorced in 10 years time or to an accountant I am going to pay some tax in 15 years time …

      Your ban it all statement may work some of the time …..but hey, who cares Harry as long as all the clients who walk into my office have fat wallets …

      Lawyers and accountants don’t plan objectives, aims and goals, they fight fires …we prevent them !

      • Litigation is a small part of legal work. Most is preventative in nature and/or connected to plans.

      • Are you saying that DB transfers are pro-active (by the adviser?) If so they shouldn’t be. Personally I mainly provided reactive advice. Anything pro-active merely consisted of a gentle reminder. (Are you doing an ISA this year?? Are you making a pension contribution? etc)

        If you have clients who walk into your office without the wherewithal to pay your fee perhaps you are operating a less than optimal system.

        • Not necessary Harry, I was just referring to your blanket statement, ban contingent charging across everything …as in “your” view its commission !
          But yes, there can be many instances that a review and recommendation of a DB transfer would be proactive (your an educated man work it out for yourself) like any other financial goal, aim, or objective.

          I will ignore your last crass statement, one’s ability to pay a fee has nothing to do with operating a less than optimal system ….. if you are saying ban any form of a clients ability to pay initial and ongoing fees from their investments & pensions then financial advice really is the for the very richest of the land.

          But the black and white mentality you and it seems the FCA adopt never really work in practice do they ?

  7. The FCA have no business imposing rigid rules that affect the advice that an IFA can give to achieve the BEST outcome for any individual. So let’s look at this logically . . .

    The regulator argues that it is concerned that individuals may be making poor decisions or being over-charged, yet the regulator is about to remove the basic right of an individual to choose anything at all when it comes to their DB pension, as they already require a pension specialist to sign off any transfer request where the CETV is over £30k.

    Personally I am not interested in taking the risk of advising ANYONE to transfer DB pension benefits with a CETV of less than £100k, unless all the circumstances of the client make it potentially seriously damaging to their own or their family’s wellbeing NOT to do so. SO if advisers are going to be restricted to charging less than they would need to charge in order for them not to saddle themselves with an unacceptable open-ended risk, then they are not then going to offer the advice in the first place. The presence of existing clients on a business’s books for whom DB transfers have been undertaken may well have a devaluing effect on that business in the eyes of a future acquisitor of the business. So why on earth shouldn’t one be entitled to charge a ‘risk premium’ in addition to the standard investment implementation charge that otherwise applies across all categories of investment business in accordance with the firm’s Client Agreement. There is nothing ‘contingent’ about that! It is just good business sense. Then if the total that would be charged makes the difference between advice in favour of transferring or not transferring, then the advice will (SHOULD BE) not to transfer. In which case only the fee for preparing the full transfer advice suitablility report will be payable. Meanwhile the FCA have no business in telling IFAs what they should charge for producing such a report.

  8. “An adviser can only provide the client with a personal recommendation not to transfer or convert their pension through abridged advice. This must be communicated to the
    client before the adviser initiates the abridged advice process. The only other outcome is that abridged advice is insufficient to draw any conclusions on whether to make a personal recommendation to transfer or convert, or not.”

    Is it me or is there an inherent contradiction in this?

    Should prove popular with advisers and clients alike.

  9. In general advisers do not go looking for DB transfer business, aside from the well publicised cases which were a minority. Enquiries tend to be client led without them realising that they are asking for high risk advice, which attracts the time and costs that the FCA have a problem with.

    I am happy that I charge what is appropriate to compensate for the thousands of hours unpaid study in order to achieve the highest level qualifications, ongoing CPD and obtaining DB transfer Gold Standard, to ensure that the client outcome is the best that it can be.

    For the FCA to put a price cap on my hard work is an insult, in addition I accept the commercial risk of approving DB transfers which even when carried out to the highest standards could be compensation claims years down the line.

    If the intention is to kill the market, so be it, but are the Treasury prepared to let the FCA wipe out the valuable source of tax revenue that pension freedoms provide ?

  10. This knee-jerk reaction is, quite simply, the end result of years / decades of failed regulation & supervision

  11. So what happened to the FCA’s long standing commitment of “not interfering in the commerciality of advice firms”.

  12. Glad I never got involved in DB transfers and didn’t waste too much time studying G60 or AF3.

  13. I completely agree that changes need to be made but once again our regulator has got this completely wrong.

    This is like saying that divorce lawyers can only charge for accumulating financial information, negotiation and advice on financials but not for the consent order….

    Or Surgeons for consultation and advice but not for the operation.

    The operation or the consent order, or in our case implementation is where the biggest risk lies, therefore where the biggest cost is incurred.

    Implementation clearly also carries additional work than just advice on viability of transfer.

    I thought that our regulator wanted clear transparent charges for each piece of work?

    That is why we designed fixed charges for advice, then a separate fixed charge for implementation if transfer was the advice.

    Okay, the biggest part of the work is stage one and presently the balance is probably wrong especially where the initial work is costed at a nominal fixed amount.

    The biggest damage is done by unscrupulous advisers charging uncapped % based charging without consideration to the fact that DB advice is a two-stage advice process, not one.

  14. @ Rob – exactly right!
    We use a PTS who charges a flat fee for the advice with an extra (smaller) fee for implementation. He has no ongoing charges bias as it is not his client. All works very well and is fair to ALL the clients.
    This new approach means he will now have to effectively overcharge those where no implementation takes place to avoid a possible loss on their cases.(Because who in their commercial right mind would work on any single case at a potential loss?) As the FCA is certain that those who shouldn’t transfer are the majority, why have they come up with a solution that so badly impacts this majority?!

    • “This new approach means he will now have to effectively overcharge those where no implementation takes place”

      @Paul Exactly, like cross subsidy. I wish they’d make their minds up!

  15. How far removed from the realities of business are the FCA?

    I have a number of concerns about the proposed ban on contingent charging.

    1. While the FCA says firms can make a profit on relatively low advice fees, I strongly suspect that those forms are in the fortunate position of having a contract with major DB schemes to give advice on Safeguarded Benefits. If Mike Lacey Mega Global PLC had an annual fee of £250,000 to give advice to Super Big Employer PLC, I could quite easily charge £1000 to the individual for advice, and remain nicely profitable, thank you.

    2. However, if I was being cynical, I would wonder if a major advisory practice would strongly incentivise their Pension Transfer Specialists to recommend the vast majority of clients to stay put. This will keep the FCA happy, regardless of actual client need; it will reduce downstream costs as there is no need to carry out post advice administration, and PI exposure is minimised.

    3. If a firm advises on a transfer of a million pounds, they have ten times the contingent liability they would have on a transfer of £100,000. If FOS find against a case in years to come, they won’t cap the redress due because the advice fee was capped. They will want proper restitution, and the higher the CETV, the greater that will cost. PI costs etc are based on quanta, not costs.

    4. If smaller practices are forced to withdraw from the transfer market, the industry will be faced with a virtual monopoly, with advice being given by a handful of larger firms. The number of advisers available to discuss transfers with clients will be diminished, which simply cannot be to the advantage of potential clients.

    5. One solution would be to charge for two events. two parts. The first would be a fee to actually advise – whether or not to transfer. The second would be for the actual transaction and I can see no problem with a sensible fee ( I’m not talking about £1500 or so) coming out of the CETV.

    Banning contingent charging will result in less client choice; an advice process clearly slanted towards “stay” regardless of client need, and a near monopoly of the advice delivery chain.

    I should mention that I have no dog in this fight as we do not offer advice on transfer of Safeguarded Benefits.

  16. Terry Mullender 1st August 2019 at 10:35 am

    So the FCA have finally buckled to the emotional and mainly irrational rantings of Mr Frank Field. How spineless of them.

    So I now charge clients an initial advice fee which will have to be the same fee irrespective of whether my advice is that they remain within their DB scheme, or that they transfer out. Personally I don’t have an issue with this provided my clients understand fully that they will have to pay me from their non-pension funds if my advice is that they remain within their DB scheme.

    I suspect this fact alone wll deter many people from instigating a DB transfer enquiry when perhaps they should have. Well done FCA. This meets with your illogical and unfounded pre requisite that “most people should remain within their DB scheme”.

    And the FCA’s proposed solution for those client’s who should not transfer out of a DB scheme is to provide them with an “abridged” advice service and charge them a reduced fee. But if we do provide them with this “abridged” advice service even though we have provided them with REGULATED ADVICE we will NOT be allowed to provide them with the appropriate signed IFA declaration confirming that they have received regulated advice! To receive their signed IFA declaration they will have to be provided with (and pay for) a FULL advice service.

    You couldn’t make this up…..

    • Tony Blair on Frank Field’s ideas about state pension reform: “The problem was not so much that his thoughts were unthinkable as unfathomable.”

  17. Currently if a £1,000,000 transfer comes from within the pension and costs let us say £10,000, it has cost the client £10,000.
    If the client is advised not to transfer and is charged £10,000 then the client has had to earn £12500 to pay the fee, if he is a basic rate taxpayer.
    Why should advising not to transfer be more expensive than advising to transfer?

  18. Should this be extended to Equity Release as many consumers do not have the funds to pay a fee until the transaction is completed?
    Surely, an effective audit of advice is the answer and not this knee jerk reaction every time.
    Absolutely clueless!!

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