FCA policy statement signals big changes in the pension transfer advice market

30 June 2020

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Our Senior Pensions Development and Technical Manager, Justin Corliss, considers the main points of policy statement PS20/6 that impact the provision of advice on pension transfers.

On Friday 5 June, the Financial Conduct Authority (FCA) released policy statement PS20/6, the long awaited response to the 2019 consultation paper on pension transfer advice.

On the same day, in response to industry calls for increased guidance in this area, the FCA also published guidance consultation GC20/1, containing examples of good and bad practice and invited feedback from the industry. This consultation period will close on 4 September 2020.

Here I consider the main points in the policy statement that impact the provision of advice on pension transfers. All the new rules and changes covered here take effect from 1 October 2020.

Perhaps the major story to come out of the policy statement is the ban on contingent charging in the pension transfer advice process. The new rules state advisers must charge and collect the same fee, whether the recommendation is to transfer or not.

To prevent what they refer to as “gaming” the ban, the FCA provides further clarification that the requirement will cover all related and associated charges, such as advice on where any transferred funds will be invested and implementation charges. This means advisers won't be able to charge one fee for the advice, and another for implementing the arrangement.

Where two advisers are involved in the process, for example where one adviser or firm provides the advice on the transfer and the other the advice on the receiving scheme and investments, both should levy and collect the same total level of fee, whether the recommendation is to transfer or not.

In effect, the charges paid by a client should not differ in a two adviser model from those payable if one adviser conducted the whole process.

It’s worth noting that if full pension transfer advice is provided on a non-contingent basis and the client proceeds to transfer, it will be possible to pay the non-contingent advice charge from the destination plan via adviser charging.

It would seem advisable for firms to have documentation on the file, before the full advice process is undertaken, that clients have a means of paying the non-contingent charge and what those means are.

While the ban on contingent charging is designed to protect consumers, there are concerns it could restrict access to advice for some consumers. These concerns often focus on consumers for whom a transfer would be the right answer, but can't afford to pay for advice on a non-contingent basis.

To mitigate these factors, the FCA has created a “carve-out” for clients who meet certain criteria. These clients will still be able to be charged for advice on a contingent basis.

This covers two groups:

  • Those with life-limiting illnesses where life expectancy is likely to be below age 75 and can't afford to pay for advice on a non-contingent basis.

    The regulator acknowledges the difficulty of obtaining medical evidence of life-limiting conditions, and particularly doing so within the three month Cash Equivalent Transfer Value (CETV) guarantee window. So the policy statement confirms clients may self-evidence their condition. This may take the form of existing documentation from a registered medical practitioner, including the details of treatment. The guidance paper GC20/1 provides more detail. 
  • Those experiencing serious financial difficulty.

    While the FCA doesn't define precisely the requirements to meet this condition, there are examples, including a definition of over-indebtedness from the Money and Pension service, and further examples in GC20/1. 

In either case, it appears quite a high bar and the FCA state in the policy statement that they expect only around 11% of consumers are likely to meet the carve-out conditions.

The FCA also remind advisers that qualifying for the carve-out doesn't make someone automatically suitable for a transfer, and that once the full advice process is completed, they expect some consumers in this group will be advised to remain in their DB scheme.

In a further attempt to mitigate the impact of the ban on contingent charging on the advice process, the FCA have introduced a new shortened form of pension transfer advice, abridged advice.

Abridged advice will still need to be provided or checked by a Pension Transfer Specialist (PTS), and that PTS will need to provide a suitability report if the recommendation is not to transfer. This short form of advice enables the adviser to:

  • Provide the consumer with a recommendation not to transfer. 


or 

  • Tell the consumer it’s unclear from the information available in the abridged advice process, whether they would benefit from a transfer.

The aim is that abridged advice will be a low cost solution, and advisers are able to provide this form of advice free of charge if they wish. Furthermore, if a client is charged for abridged advice and then proceeds to full advice with that firm, the abridged advice charge is deducted from the full advice charge to ensure clients aren’t charged for the same piece of work twice.

The abridged advice process will include a full fact find and risk assessment for the client, and in a change from the initial proposal in the consultation paper, can involve the adviser collecting further information on the ceding scheme.

So abridged advice will consider the risks involved in staying in the scheme and the risks to transferring and losing safeguarded benefits. Abridged advice could be an effective means of identifying those eligible for the carve-out.

However, the adviser can't produce an appropriate pension transfer analysis (APTA), transfer value comparator (TVC) or consider the consumer’s proposed receiving scheme. If any of these activities are undertaken, it would constitute full advice which would have to be charged for accordingly.

It’s also worth noting that abridged advice doesn't satisfy the requirement to take advice before transferring benefits. So abridged advice alone won't be sufficient for the same or another regulated firm to arrange a transfer for the client. Full advice is required for this.

The regulator says they expect that when abridged advice results in an unclear outcome and the client proceeds to full advice, this will still result in some recommendations not to transfer.

In CP19/25, the regulator proposed strengthening its requirement for advisers advising on pension transfer business to consider the default investment within the workplace pension where one exists.

The new rule in PS20/6 builds on the existing requirement which was “to demonstrate that any alternative pension plan the client is transferred to is at least as suitable as the workplace pension”, to the adviser having to demonstrate that it’s more suitable than the workplace pension.

Firms that offer a restricted range of products, or those who are independent and use a panel of products will still need to adhere to this rule. This will include vertically integrated firms who may usually recommend from a range of in house solutions.

To further demonstrate the extent to which the regulator wishes to see the workplace pension considered, where the member has an existing workplace pension, a comparison of this scheme needs to be included in the one page suitability summary issued to clients in advance of the transaction. An example suitability summary is available in annex 2 of the policy statement on page 65.

Final thoughts

There are a number of other relevant points in the policy statement, many of which are more thoroughly examined in the accompanying guidance consultation GC20/1, and I’d urge any advisers involved in the pension transfer market to investigate these documents further.

It will be interesting to see how these changes impact the access to advice post October 2020 when the rules come in to force, and just as interesting to see activity levels in this market between now and October. I expect the regulator will be paying especially close attention to the suitability of advice given in the lead up to these new rules coming into force.

For anyone looking for further information on this subject, Royal London has created a 30 minute podcast which explores the policy statement in greater detail.

Please also look out for further pension transfer related articles from Royal London both in our adviser newsletter and the trade press.

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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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.