The FCA’s latest consultation on the Defined Benefit (DB) transfer advice framework marks the next step in its journey to set clearer expectations for advisers and deliver better outcomes for clients.
The consultation builds on the changes introduced last year and its focus is on reducing scope for conflicts of interest and helping more consumers understand the benefits of sticking with their guaranteed DB pension.
The consultation document, CP19/25, Pension transfer advice: contingent charging and other proposed changes, runs to over 160 pages. As background, the FCA is still concerned that too many consumers are transferring. It’s clear that with the existing FCA guidance available, advisers have the tools to know what good advice looks like so the challenge is probably still one of consumer behavioural bias.
In other words, too many consumers have already made their mind up before they even seek advice so the proposals included in the consultation document are there to get consumers to think twice.
The key proposal is:
1. A ban on contingent charging (i.e. charging structures where there's no fee unless a transfer goes ahead).
One clear potential benefit of this proposal is that clients should stop and think about if they want to pay a fee before going ahead with the process.
However, there are two key areas of concern which have previously been raised here:
- It potentially restricts access to advice for vulnerable customers
- The ability for the removal of contingent charging to be ‘gamed’ or worked around
So the following proposals have also been made:
2. Restrictions on ongoing charges if a DB transfer goes ahead (to stop the ban being circumvented through a token initial advice charge, then high ongoing charges post-transfer).
3. A new option to give 'abridged' advice where the recommendation is not to transfer (to help make advice more accessible).
There are also plans to fine-tune the rules around suitability reports, cashflow modelling and the transfer value comparator (TVC). Plans also include a requirement for pension transfer specialists (PTS) to undertake at least 15 hours of CPD annually (with at least five hours provided externally), with a specific focus on transfer advice, in addition to their usual CPD requirements.
The FCA’s proposals: the details
Contingent charging ban: Advisers will have to charge a fee regardless of whether they recommend clients stick with DB or transfer. The same charge must apply either way and furthermore, fees for transfer advice can't be offset against charges for other work.
There will be an exemption from the ban for clients either in serious ill-health (life expectancy less than 75) or facing serious financial hardship. But if advised to transfer, clients charged on a contingent basis must pay the same fee as would have applied to other clients.
Ongoing charges: Post-transfer, ongoing charges can't be higher than if the funds had not come from a DB transfer. So, for example, if the funds move to a SIPP, the adviser's usual ongoing SIPP advice fees should apply but with no 'DB transfer' premium.
Where the client is a member of a workplace pension, but the adviser recommends a DB transfer to a different pension, the adviser must demonstrate why the recommended pension is more suitable. The appropriate pension transfer analysis (APTA) must include analysis of a transfer into the qualifying workplace pension scheme (QWPS) using its default fund.
Abridged advice: The FCA reiterates its support for ‘triage’ services, which help clients decide if it’s worth paying for DB transfer advice but it’s clarifying when this is likely to stray from guidance into regulated advice. In particular, the FCA has highlighted that giving clients ‘decision trees’ or ‘RAG indicators’ that suggest a particular course of action based on their personal circumstances are likely to cross the advice boundary , so these tools should not form part of a triage service.
The FCA has given some really good examples of how to offer triage safely in previous consultations, such as the examples included in the FCA’s Perimeter Guidance manual (PERG 12, Annex 1).
To help create a bridge between triage and full advice, the FCA proposes a new option to give ‘abridged’ advice. This allows advisers to recommend against a DB transfer without undertaking, or charging for, full advice. In effect, abridged advice facilitates a two-stage advice process which can stop part way if DB transfer doesn’t look right for the client.
Abridged advice still requires a full fact-find, risk assessment and suitability report but there's no need to undertake an APTA or produce a TVC. Abridged advice must be carried out, or checked, by a qualified PTS and constitutes a personal recommendation.
Full advice is still required before a DB transfer can proceed.
Shaping a framework for the future
Anything that places consumer interests at the heart of the advice process and gives advisers more certainty on the regulator’s expectations can’t be bad.
If these FCA proposals reduce demand from consumers who should not be transferring from a DB scheme, that’s probably good for advisers.
Clearer triage rules, and the new option to give abridged advice, should help more DB members better understand the true value of what they’ve got without going through the time and expense of a full advice process. These proposals should also help advisers focus more of their valuable time on clients where a transfer is more likely to be suitable.
The real challenge however is to create a framework that helps to ensure vulnerable consumers, who would benefit from transferring but cannot afford an upfront fee, aren’t put off seeking professional financial advice to reach the right decision.
This consultation is our industry’s opportunity to help shape a framework for the future, so use the period up to 30 October to have your say.
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