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FCA early exit fees cap ‘paves way to price regulation’

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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.”

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. It was the Government that wanted action and the FCA as an independent Regulator responded in agreement – as if they had any option! It is easy to blame the FCA but what we tend to overlook in all this is that the FCA found that the providers could offer no reason why these charges were needed, no justification could be made. Stop faffing around I would agree with but the FCA are concerned that if all exit charges were removed we would churn policies. So the unscrupulous among us are because of FCA fears penalising our clients under age 55 who should move but cannot.

  2. Let’s not get disingenuous about this. Exit fees levied by providers are in addition to upfront fees and the management fees of the funds. They were imposed because the providers were trying to bamboozle clients with regard to costs. What they should have done is just increase the initial costs – that would have been a lot more honest and probably resulted in less business for them. Remember that not all providers charge exit fees – only the greedy and less honest ones.

    This is not the same as regulating price. It is an attempt to impose clarity and honesty. What you may charge a client upfront is agreed and transparent – quite different from these exit fees.

  3. I agree with Harry. Nothing to worry advisers here. A barrier is being removed to allowing people to access their own money. Providers have a choice – they could, for example, make their existing schemes more flexible!

  4. It’s easy to look back from where we are today and rubbish old plans, but the fact is that the purpose of initial/capital units was to recoup initial costs over the written lifetime of the contract ~ and contracts are what they were, good, bad or indifferent. What the FCA (presumably at the behest of the government) is trying now to do is to rewrite history and the providers in question may well be within their rights to resist this with all the resources they can muster.

  5. Will this impact SJP? Or does their commission based contract with exit fees, they somehow manage to spin out as a fee side step the rules?

  6. For goodness sake I thought we lived in a free market economy. Well we did until regulation comes along and dictates to providers the terms on which they must operate. Isn’t our job as IFAs to spot the duff deals and recommend accordingly?

  7. For reasons on which we can only speculate, SJP (and HL) appear to have a special exemption from certain regulatory rules by which everyone else is required to abide.

  8. Yep here we have it folks, the first steps to fix prices, the cure, to lowering the cost of advice, and easier terms for people to access their pensions so they can pay the tax on it. A politically points scoring move from government and the FCA but I don’t see them having to cut their budgets anytime soon.

    Corporate bullying at its worse, from people, with a do as say not as I do, mindset

    If this is disingenuous the so be it !

  9. My goodness. I just can believe that advisers are sticking up for these kinds of providers. Julian if these providers would have been honest in the first place there would have been no need for initial units. After all not all contracts had initial units. Do you really think that in 2016 they haven’t creamed off a fortune from their unspspecting clients already. After all all these are mainly old contracts (except fpor the ones that SJP flogs) and have been running years. Time to call time on the rip off.

  10. No disrespect Harry isn’t the job of a good IFA to spot the bad deals and not the regulator to dictate terms on providers. As I said earlier this is supposed to be a free market economy. Do you remember the much hated price fixing policy of the Labour government back in the 1970s which was immediately scrapped when Thatcher came to power. Well it looks like it’s coming back!!

  11. @Johnny B
    What we have is basically a failure (again) of regulation. Many of these old contracts preceded regulation anyway. But it has taken the regulator far too long to come to grips with this problem. If you look at it less from the perspective of price regulation (which I guess it is) and more about the regulator fulfilling its prime objective of protecting the consumer. No one is suggesting that providers should charge less in upfront, transparent fees, but this method of charging and the penalties around it just bring the industry into disrepute.
    Would you therefore suggest we go back to the days of 8% commission of bonds for the networks?

  12. I can see both sides with this argument and overall I am quite ambivalent as I have very few clients where this will apply. I do however have one or two in there early 50s so rapidly approaching age 55 where they could take PCLS but have a difficult decision where the plan was established to 65 or even 75 (I didn’t arrange ANY of them) and the penalty just for taking PCLS is excessive, so bearing in mind by now the provider has had time to recoup MOST of their excessive charges, on balance I think the change to max 1% exit charge is timely. Any earlier and I would have been on Julians side of the argument, but I think it is time for this change and I very much hope it is applied to those vertically integrated firms mentioned earlier too so that we ALL are on a level playing field going forward (and back)

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