A closer look at consultation paper CP19/25

23 August 2019



Justin Corliss, Senior Business Development Manager at Royal London, reports on the proposed changes in the FCA's recent consultation paper about pension transfers and contingent charging.

On 30 July 2019, the FCA released consultation paper (CP19/25) on the subject of pension transfers. The aim of the paper is to consult on a number of proposed changes to achieve the following objectives:

  • Reduce the scope for conflict of interest by banning contingent charging
  • Reduce the scope for conflict of interest by limiting firms’ ability to recommend transfers that incur unnecessarily high ongoing adviser and product charges
  • Improve charge disclosure and implement checks on customer understanding
  • Increase continuous professional development requirements for pension transfer specialists (PTS)
  • Improve data collection from firms
  • Amend technical areas of the rules and guidance to clarify and extend existing requirements

The tone of this consultation paper (CP) is very different to previous policy statements (PS) and CP’s. It’s more direct, more prescriptive and more decisive than we’ve come to expect from the FCA. It’ll be interesting to see if this stern tone and tough stance makes it all the way to the PS. The consultation period closes on 30 October 2019 with the resultant PS expected in Q1 2020.

Before looking at the seven proposed objectives in more detail, let’s have a look at - what’s prompted this consultation paper in the first place.

  • The FCA's concerned that too many advisers are delivering poor advice, much of it driven by conflicts of interest in the way they’re remunerated. The primary concern’s around contingent charging (CC), where the adviser’s only remunerated if the transfer goes ahead. Most people receiving advice on pension transfers are currently advised on a contingent basis.
  • Data the FCA has collected since pension freedoms began in April 2015 suggests 69% of customers seeking advice on pension transfers were advised to transfer, although this falls to 55% once known triage clients are factored in.
  • This isn’t skewed by a few advisers. Recent findings showed 60% of firms holding these permissions recommended over 75% of enquiring customers to transfer.
  • In recent thematic reviews by the FCA, only around 50% of advice was deemed suitable.
  • In recent years, the FCA has repeatedly reiterated its stance that a transfer won’t be in the best interest of most people. This if nothing else suggests the FCA expect the ratio of transfer to enquiry should be less than 50%.
  • The impact of ongoing adviser charging on the initial advice decision and the impact this has on the customer’s retirement savings are given much closer inspection than we’ve seen in the past.





The FCA’s proposing a ban on contingent charging (CC) as they believe it could be creating a conflict of interest for advisers. In CC, pension transfer specialists (PTS) provide advice on pension transfers, but they only receive remuneration if the transfer goes ahead. The advice fee is generally taken from the product transferred into. There are a few variations of this, such as a small fee for the advice, but a much larger fee for transacting the business. But the FCA isn’t distinguishing between the two at the moment, and the ban would apply to all forms if it goes ahead.

The FCA hasn’t found definitive evidence that CC is linked to poor customer outcomes, and believes this is very difficult to prove. However, with mounting pressure from bodies such as the Work and Pensions Committee, it’s likely that the ban will go ahead.

From their data collection findings (referred to as thematic reviews DB1, DB2 & DB3) when CC is used, the average initial advice charge ranged from £7,000 to £10,500 - but in a purely fee based model, it ranged from £2,500 to £3,500. The increased initial fee in the CC model will impact the long term growth of the plan. It’s not clear from the consultation paper (CP) whether the £2,500 - £3,500 was for advice only or also covered implementing the transfer which is included in the CC.

The FCA’s proposing a “carve-out” to any ban on CC for specific categories of client. This means that a small minority of customers can still be charged on a contingent basis. These include customers with limited life expectancy, and those experiencing significant financial hardship. The bar for each of these categories will be pretty high and is unlikely to apply to most people. What’s more, the ban on CC is only being proposed for pension transfer business.

  • The FCA acknowledge that the likely outcome of this is a reduction in access to advice and fewer transfers, but feel that this is an acceptable price to pay to achieve the outcome. To help with this issue, the FCA proposes to introduce a light version of advice called ‘abridged advice’. They expect this will be more affordable and the client must be informed at outset that the only possible outcomes are: For the pension transfer specialist (PTS) to advise the transfer’s not suitable, or
  • The PTS can’t make a decision without providing full advice.

The advice will still have to be given by a PTS, with a full fact find, assessment of attitude to risk, assessment of attitude to transfer risk and capacity for loss. If the advice is not to transfer, the client can’t use this as evidence of having taken advice to then proceed on an insistent basis. But an appropriate pension transfer analysis (APTA) or transfer value comparator (TVC) isn’t needed which will further reduce time and cost of providing abridged advice.

So, won’t advisers just find a way around the CC ban, maybe by charging a token amount for advice and then a big charge for implementing the recommendation? The FCA has thought about this and proposes the following rules to prevent what it refers to as “gaming” the CC ban:

  • No offsetting other work they do for the client against pension transfer cost
  • Not charging less for pension transfer advice than they would for advice on a non-pension transfer case
  • Not charging more on an ongoing basis than they would for a non-pension transfer case
  • Must charge for advice where any service related to full advice has been undertaken. For example, APTA or TVC

From the Retail Mediation Activities Return (RMAR) baseline report, the FCA find the average ongoing adviser charge (OAC) on amounts over £200,000 is 0.66%. Other findings suggest 36% of customers who transferred, invested in a solution costing more than 1.5%. The consultation paper (CP) breaks down what different OAC equates to as a monthly pound charge on different investment levels, and what proportion this is of the initial defined benefit (DB) payment, if the client took that instead.

The FCA propose advisers should have to clearly show the cost, in pounds and pence of the OAC and product charges, at the beginning of a pension transfer report. Annex 1 on page 48 of the CP illustrates this.

The FCA believes these measures are necessary to protect people from being advised to transfer into destinations that:

  • Are too complex for their needs
  • Perpetuate the need for unnecessary ongoing advice charges that ultimately reduce consumer’s income in retirement

In an effort to address this the FCA say “We consider that if a transfer from safeguarded benefits to flexible benefits is suitable, a default option within a workplace pension scheme  (WPS), if available, is more likely to be a suitable destination option for many consumers. Many consumers often have no or limited prior knowledge and experience of investments. They would also receive the protections afforded by Investment Governance Committees (IGC) or trustees. A WPS will also be an attractive option for many consumers who wish to consolidate their pension savings in one place”.

WPS have a charge cap of 0.75% in the default investment, so this would continue to apply to DB funds transferred into it.

The FCA proposes requiring firms to demonstrate why the scheme they’ve recommended is more suitable than the WPS. This is an increased requirement from the current position which is to prove it’s at least as suitable. The FCA mention that this is the current requirement, but despite this only a small proportion of transfers go into a WPS.

The FCA proposes firms will have to include analysis of a transfer into a WPS in the appropriate pension transfer analysis APTA where applicable.

The FCA list valid reasons for not considering a WPS including:

  • Client doesn’t have one
  • Scheme doesn’t accept transfers in
  • Advice sets out how and why member will access benefits within 12 months and the WPS can’t facilitate this
  • Client can demonstrate active investment experience as a self-investor

The FCA’s concerned that, regardless of conflicts, charges are unclear and consumers don’t fully understand the implications of advice. So they’re proposing to improve charges disclosure at the start and the end of the advice process.

In the most recent findings, 62% of advice was non-compliant on disclosure and communications. Because of this, the FCA believes people aren’t aware of the charges they’re paying, either for initial or ongoing advice.

 The FCA also claim ongoing pension advice is frequently misrepresented as a mandatory feature of the pension transfer package, rather than as an optional extra the client can cancel at any time.

The FCA believe in some cases, firms have recommended that clients invest in schemes where the total charges have the potential to cancel out future investment returns - so the client had a high risk of being worse off.

To remedy this, the FCA proposes that before giving advice (abridged or full) a firm must send the client a letter of engagement that sets out, in pounds and pence, the amounts that would be paid in various conditions.

The FCA also proposes that firms must include a one page summary at the front of all transfer suitability reports requiring a pension transfer specialist (PTS).

The summary must include:

  • The charges in pounds and pence at the front of the file. There’s a template on page 48 of the consultation paper (CP). The adviser’s recommendation. The client must be invited to sign this summary to confirm they intend to follow the advice of their adviser.
  • Statement of risks associated with pension transfers. The client must sign the summary to confirm they understand the risks they’re taking.
  • The monthly and annual pound and pence figure incurred by the client if they accept the offer of ongoing advice. It must also be made clear the client doesn’t have to take ongoing advice and that it can be cancelled at any point. The client must sign summary to say they are prepared to go ahead with the ongoing advice.
  • If it’s a two adviser model, then this one page summary needs to include these details for both firms.
  • It is also likely it’ll have to clearly disclose whether the advice provided is abridged or full advice.

To cover the issue of people not appreciating or understanding the risks involved and therefore not being in a position to make an informed decision, the FCA propose the firm must gather evidence that the client can demonstrate that they understand the risk to them of proceeding with a pension transfer before finalising the recommendation. The firm must keep a record of this on file.

If a client can’t demonstrate they understand the risks, or aren’t prepared to sign the summary to confirm their understanding, the pension transfer specialist (PTS) shouldn’t generally make a recommendation to transfer.

Recent supervisory findings show continued concerns about the suitability of advice on pension transfers. The FCA believes the competence of a pension transfer specialist (PTS) is one of the potential drivers of unsuitable advice and therefore they want to ensure skill levels are high and are maintained over time. The FCA say a PTS must be able to evidence that they are improving their knowledge by keeping up to date with current thinking, market trends and changes to the FCA handbook in this area.

To address this, the FCA proposes PTSs must undertake a minimum of 15 hours CPD per year, specifically focused on pension transfer advice. This is in addition to any other existing CPD requirements for other types of business.

At least 5 of the 15 hours must be provided by resources external to any firm that employs or contracts services from the PTS. This is to ensure the adviser is not just receiving the “house view” on the pension transfer market.

The FCA said “the efficient collection of data provides us with up to date information on the markets we supervise to enable oversight and appropriate action”. Given the high risk attached to advice on pension transfers and conversions, and issues around the availability of professional indemnity insurance (PII), they seek more data on pension transfers.

The FCA proposals include:

  • A new section of the Retail Mediation Activities Return (RMAR) on pension transfers, to be completed every 6 months. It will exclude transactions that don’t require a pension transfer specialist (PTS), conversion of GARs for example
  • This will enable the FCA to monitor:
    • Number of consumers a firm advises to remain / transfer
    • Number of pension transfer specialists (PTS), introductions accepted and appointed reps
    • The number of retail clients, transfer values and revenue generated
    • The number of retail customers who agreed to ongoing services
    • Charging structures used for pension transfer advice
    • The cost and types of investment solution

On 1 April 2019 the FCA lifted the Financial Ombudsman Service (FOS) compensation limit from £150,000 to £350,000. They acknowledge the impact this has on advisers ability to secure cost effective professional indemnity (PI) cover, particularly for pension transfer advice, but feel it’s acceptable collateral damage to improve outcomes for and to protect consumers.

The FCA proposes to have firms confirm:

  • They have no exclusions or limitations to their PI cover
  • Whether any exclusions apply to past or future business or both
  • The nature of the exclusions applying to business lines

The FCA has been looking at the definition of the pension transfer for quite a while. The most significant proposal here is to amend the definition of a transfer to only include transfers of safeguarded benefits to flexible benefits. Transfers of flexible benefits would be completely excluded. However the proposed definition would still include certain transfers of safeguarded benefits to another scheme which also offers these benefits.

With regard to the transfer value comparator (TVC), the proposal is to reduce the assumed product charge from 0.75% to 0.4%. This will make the transfer look more favourable than it would on a 0.75% charge on a TVC basis, as it’s not assuming as great a drag on investment performance up to scheme normal retirement date. The FCA also clarifies some assumptions including age of spouse or whether one exists at all can be clarified in the appropriate pension transfer analysis (APTA). There are a few other proposals regarding the TVC when scheme normal retirement age is within 12 months or has passed. These are covered in pages 42 and43 of the consultation paper (CP).

There was also some comment on cash flow modelling. The FCA confirmed it’s not mandatory, but that it’s helpful. The FCA set out the following requirements regarding cashflow modelling:

  • Must be in real terms (accounting for inflation)
  • If including tax, must use real assumptions
  • Must account for lifetime allowance (LA) or money purchase annual allowance (MPAA) where relevant

The modelling must include stress testing scenarios to illustrate the impact of less favourable future scenarios - so the client can see more than one potential outcome. This is to address the issue of many cash flow modelling systems being deterministic rather than stochastic.

The final point, which we’ve already touched on, has hit a real nerve with many in the advice community. The FCA suggested that transfer advice should be able to be profitably provided for around £3,500. They base this on the average pension transfer specialist’s (PTS) hourly rate being £200 an hour and support staff £100. The FCA say a transfer should take 20 – 25 hours to complete, with half this time taken by the PTS and the other half support staff.

Due to the volume of content in the consultation paper, we’ve mainly focused on reporting the regulator’s proposed changes. In upcoming newsletters we’ll consider the implications for advisers active in this market, and people seeking advice.

About the author

Justin Corliss

Senior Pensions Development and Technical manager

Justin’s first foray into Financial Services was in Australia in 1997 with Commonwealth Bank of Australia working predominately in retail mortgage lending. In 2002 Justin and his British wife moved to Scotland where he worked in broker consultant roles with both Scottish Widows and Scottish Life before spending a brief period as an Employee Benefits Consultant dealing predominately with Auto Enrolment and associated business consultancy. Justin is involved in developing adviser facing content, presenting, writing articles and commenting for the press. Justin has studied continuously since arriving on these sunny shores and holds the Advanced Diploma in Financial Planning including the CeMap and Lifetime Mortgage qualifications. His primary focus is pension planning and he holds the AF3 & AF7 qualifications. A huge sports fan, Justin will happily discuss the merits of the Australian cricket team for hours on end.

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