Regulatory update: CP19 / 25 – Pension transfer advice: contingent charging and other proposed changes

Posted: 1st August 2019

Background

As part of its continuing work in the pensions transfer market, the FCA has, on the 30th July, published a new Consultation Paper on proposed rule changes that are designed to protect customers from advice that goes against their best interests.

The Consultation Paper also proposes a ban on contingency charging, in which a pensions adviser would only be paid if a transfer was to go ahead, as a means of negating some of the conflicts of interest seen within the market.

The FCA considers the proportion of customers advised to transfer from ‘defined benefits’ (DB) to ‘defined contribution’ (DC) schemes to be "too high" and that much advice is not actually suitable for customers. The regulator has made it very clear through its recent work that it views DB pensions as “extremely valuable”, providing an inflation-proof income for life.

Discussing the proposed rules, Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said:

“By making changes to the way advisers are paid for transfer advice and the other changes to transfer advice we are proposing today, we want to ensure people receive suitable advice and drive down the number giving up valuable defined benefit pensions when it is not in their interests to do so.”

Other proposals within the FCA’s latest package include:

• Requiring providers to offer one or more investment solutions
• Reducing charge complexity
• Increasing transparency (through new templates for suitability reporting)

The regulator wishes there to be far more transparency in advice provided. As such, CP 19 / 25 provides a number of sample advice sheets that the FCA would like to see become the standard across the market. Firms will be expected to lay out, explicitly and in writing, the percentage of current scheme income that would be spent on charges if a transfer took place, the full cost of pensions advice and the equivalent worth in terms of months of income. This could be a major change for many firms, a strain for some and may result in some players leaving the market.   

Next Steps

The FCA is consulting on the new rules and is requesting comments and feedback by Wednesday the 30th October. Firms wishing to make their voices heard should ensure they engage with the regulator before this date.

The regulator will then consider the feedback and publish finalised Handbook text in a Policy Statement in the first quarter of 2019.

Considerations for firms

Naturally, the firms that are most likely to be affected by the proposed changes to Handbook rules will be those firms providing advice on pension transfers. However, the Consultation Paper should also be heeded by trade bodies, pension scheme administrators and any other firms that work with or around pensions transfers.

Pension transfer advisers will soon be required to demonstrate why any scheme they recommend is more suitable than the consumer’s workplace pension scheme. The example suitability report provided within the Consultation Paper’s appendix will be a good (if not definitive) starting point for developing transparent and clear reports for customers.

It should also go without saying that firms need to prepare now, and appropriately restructure their operations, in anticipation of a ban on contingency charging. If your firm and its advisors rely on contingency charging to operate, then it will soon have to come up with new ways to protect the ‘bottom line’.

Firms that operate in this market must, as a priority, take on board all of the recommendations that have emerged from the FCA’s work – not just this specific Consultation Paper. Specifically, where the FCA has published failings, firms will need to carry out internal healthchecks to identify whether the same – or similar – issues may exist within their own organisations.

Third-party consultants would be well placed to provide an independent view on your business’ current state and advise you on how to attain and maintain compliance going forward.

As the FCA continues to place further obligations on this market, firms in this space will surely have more work to do to ensure that consumers receive appropriate communication. If your firm does not yet have the resource in place to deal with large volumes of customer contact, then it is now time to start developing this capacity.