Regulation

FCA bans contingent charging in new pension advice rules

Advisers will be required to demonstrate why any scheme they recommend is more suitable than the consumer’s workplace pension scheme.

Rozi Jones
|
30th July 2019
FCA new
"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."

The FCA has outlined a ban on contingent charging for pension transfer advice as part of a new package of proposals.

The regulator says the ban will help to "protect customers from the conflicts of interest which arise where a financial adviser only gets paid if a transfer goes

In a statement, the FCA said: "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. Therefore, the proposed ban would apply unless consumers have specific circumstances that mean a transfer is likely to be in their best interests."

The FCA is also looking to address the conflicts of interest which arise where a financial adviser advising on a pension transfer stands to receive ongoing fees – which in some cases can be for 20-30 years following the transfer. The FCA has proposed that advisers will be required to demonstrate why any scheme they recommend is more suitable than the consumer’s workplace pension scheme.

As well as addressing contingent charging, the FCA is consulting on other measures to change how advisers manage and deliver pension transfer advice. These include introducing abridged advice so that firms can deliver low cost advice to customers who should not transfer, improving how charges are disclosed and setting out how advisers should demonstrate customers’ understanding of the advice.

The FCA has also published a feedback statement on its Discussion Paper on effective competition in non-workplace pensions. The FCA found that many consumers are not engaged in pension decisions or aware of charges they are paying. Additionally, products and charges are often too complicated to compare – leading to a lack of price competition.

The FCA has therefore outlined a package of potential measures to protect consumers – these could include requiring providers to offer one or more investment solutions, reducing charge complexity and increasing transparency, so that consumers better understand the impact of charges on their savings.

It will then consult on new rules for non-workplace pension schemes in early 2020.

Christopher Woolard, executive director of strategy and competition at the FCA, said: "The FCA’s supervisory work has revealed continued problems in the pensions transfer advice market.

"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."

Steven Cameron, pensions director at Aegon, commented: "The market is divided on whether or not contingent charging is beneficial to those considering transferring from a DB scheme. The FCA has recognised that while contingent charging can create conflicts of interest, an outright ban could widen the advice gap.

“The development of an abridged form of advice will allow customers to be advised when it is not in their interests to transfer without incurring the higher costs of full advice. We very much welcome this and it will now be important to think through the practicalities so this is as effective as possible. This should reduce the need for contingent charging."

Related articles
More from Regulation