Listen to Fiona and Justin as they take a closer look at what the contingent charging ban involves, what the exceptions are to the ban and the impact this has on adviser charging.
FH: Hi, my name is Fiona Hanrahan, and welcome to our latest podcast today I'm joined by Justin Corliss and we are discussing the ban on contingent charging Justin.
JC: Hi Fiona, how are you?
FH: I'm really good, thanks. Could you start by explaining what the ban contingent charging involves, please, Justin?
JC: Yes, certainly. In policy statement 26, which was produced in June 2020, the FCA announced a ban on contingent charging from the 1st of October 2020. Now, for anyone not aware, contingent charging is the practise of providing advice and a recommendation in this case on pension transfers, but only collecting a fee for this advice or collecting a higher fee if the client proceeds to transfer. Now, the ban does not extend to non pension transfer advisers. It's only relevant for cases that require an input from a pension transfer specialist.
Now the new rules state an advisor or firm must must charge and collect the same level of fee, whether or not the advice result in a recommendation to transfer and regardless of whether the transfer goes ahead.
FH: Thanks, Justin. But what if the firm separates the steps and makes one charge for the advice and then a separate charge for implementing the recommendation?
JC: Yeah, that's probably the question I've been asked more than any other since the policy statement was published. So let's clear that up. No, that's not possible. The adviser or firm must charge and collect the same fee for full advice, regardless of whether the transfer goes ahead.
FH: OK, thanks. So what about instances where there are two advisers involved, possibly from different firms and one advises on the transfer and the other on the receiving scheme and funds?
JC: Okay, where this is the case, both sets of fees need to be charged and collected regardless of whether the transfer goes ahead. Now, given the regulator's stance that an advisor advising on a pension transfer can't do so without considering the receiving scheme and fund, it does make sense. It's not possible to argue the receiving scheme and fund are only advised on if the recommendation is to transfer, because these need to be considered in the transfer advice. So both sets of fees need to be charged and the fee to the client of a two adviser model should be the same as if one adviser was doing it all.
FH: OK, are there any exceptions to the ban on contingent charging?
JC: Yes, you've probably heard of something that gets referred to as the carveout. This allows contingent charging to still be used for specific groups of consumers with certain identifiable circumstances, which may make a transfer more likely to be suitable for them, but who were unable to afford advice on a non-contingent basis. There were two criteria that meet the carveout requirements, and they're called serious ill health and serious financial difficulty. Details can be found in well, in a few places in the policy statement 26 or in the guidance consultation GC twenty stroke one or even in the subsequent finalised guidance that that came out in March of 2021 March of this year, finalised guidance twenty one, stroke three.
Now I'll just point out that the FCA estimate that only around 11 per cent of consumers are likely to meet the criteria for the carve out so they don't expect the use of the out to be widespread.
FH: So adviser charging is no longer possible for a pension transfer business then?
JC: I can see why you would get to that. But actually, no, that's not the case. If the transfer goes ahead, it will still be possible for the client to pay the advice charge from the receiving plan via adviser charging. Now, advisers can discuss this option with their clients, but they'll also need to discuss that the fee is still payable if the transfer doesn't go ahead for whatever reason and there's no receiving scheme from which an adviser charge can be taken.
FH: OK, Justin, that all seems pretty clear, but won’t that mean that all consumers will now face a substantial advance fee if they want advice on a pension transfer?
JC: Well, yes, it means that most consumers taking full advice on pension transfers will need to pay the full fee regardless of the outcome. But the FCA have attempted to mitigate this by introducing what they describe as a shorter, lower cost form of advice, called it bridged advice. Now, advisers don't have to offer a bridged advice, and if they do, they can offer it free of charge, although they must ensure that they're not doing so in an attempt to undermine the ban on continued charging.
Now, abridged advice can only have one of two outcomes, a personal recommendation not to transfer or that it's not possible to make a decision without proceeding to full advice, while perhaps not a perfect solution, it should prevent some people for whom a pension transfer is clearly unsuitable from incurring the cost of full advice to find this out.
FH: That's great. Thanks for all of that, Justin.
JC: Thank you.