The FCA admits the much-discussed ban on contingent charging has ‘polarised’ the industry and it will allow some contingent charging, especially in cases where it is proved pension savers cannot afford advice otherwise.
Apart from banning most contingent charging from October, the regulator will also implement sweeping changes for financial advisers who wish to remain in the DB transfer market.
The changes are detailed in PS20/6 published today (see link below).
Contingent charging occurs when an adviser charges a fee for transfer advice only when the transfer goes ahead. A number of bodies, including the Personal Finance Society, have argued that ending contingent charging completely will prevent many lower income pension savers from getting advice.
The FCA says it will also provide more support for pension savers who are considering whether to transfer out of a DB scheme, or who have transferred out, with new guidance issues today by The Pensions Regulator.
In a package of measures to reform the DB transfer market the FCA will:
• Ban contingent charging in “most circumstances” - a move the FCA says will help ‘good advisers’ to compete better in the market
• Advisers must consider a workplace pension as a receiving scheme for a transfer and, if they recommend an alternative solution, demonstrate why that alternative is more suitable.
• The FCA will also implement proposals allowing advisers to provide an ‘abridged advice process’ to make initial advice more affordable.
To assist financial advisers giving transfer advice, the FCA has issued a Guidance Consultation designed to help advisers ensure consumers get suitable advice.
The changes follow many months of review and study of the often-criticised DB transfer market.
In reviewing the DB transfer market the FCA has collected data from over 3,000 firms. The FCA gave feedback to over 1,600 of these firms and “as a result” over 700 firms gave up their permission to provide pension transfer advice.
In addition, the FCA conducted in-depth reviews of the 85 most active firms in the market, who were responsible for 43% of transfers between April 2015 and September 2018.
The FCA said it found an improvement in the suitability of advice over time, with the suitability of advice rising from a low point of 47% in previous years to 60% in 2018.
However, the FCA said it remained concerned at the number of files which advice appeared to be ‘unsuitable’ or where there were information gaps. The number of files where the advice appeared unsuitable was 17% and this remains “unacceptably high,” said the FCA.
Where firms have not met the required standards, the FCA expects firms to look at their past business and pay redress where appropriate. The FCA said it will will continue to ensure the removal of firms from the market when standards have not been met.
The FCA is undertaking 30 enforcement investigations arising from concerns identified in the course of its DB transfer work.
The FCA has produced an 'advice checker' which will provide customers with information about the advice they should have received.
The FCA has also carried out a detailed review of transfer advice given to British Steel Pension Scheme members and found a higher percentage of unsuitable advice than across the market (see separate story).
Christopher Woolard, interim chief executive of the FCA, said: “The proportion of customers who have been advised to transfer out of their DB pension is unacceptably high. While much of the advice we looked at was suitable, we are still finding too many cases in which transfers were not in the customer’s best interests.
"What we have set out today builds on the work we have been doing and reflects our determination to improve standards in this market. Customers need to have confidence that the advice they are receiving is right for them. The steps we are announcing today will drive up standards."
• PS20/6 Pension Transfer advice: feedback on CP19/25 and final rules and guidance