FCA to ban contingent charging on DB pension transfers from October

The Financial Conduct Authority (FCA) is moving ahead with a ban on contingent charging for defined benefit (DB) pension transfers in most circumstances.

The ban on contingent charging, where financial advisers only get paid if a transfer goes ahead, will take effect on DB transfers from 1 October 2020.

However there will be ‘carve-outs’ in the rules, which mean that contingent charging will still be allowed for those whose health means they are not expected to live until they are 75 or people who are in “serious financial difficulty”.

The FCA admitted that some people who may have benefitted from a transfer may be discouraged from taking advice as a result of the ban, but argued that the potential harm to this “smaller group” of consumers would be outweighed by the potential benefit to a “much larger group”.

It estimated that two in three people who no longer take advice would not have been suited to a transfer, while one in three may have been suited to a transfer and benefitted financially.

The ban was agreed following a consultation, initially published in July 2019, which the FCA said it received “polarising” responses to.

Ultimately, the regulator decided to proceed with the ban as it felt there was a conflict of interest for DB transfer advice where the only two outcomes are to transfer or not to transfer.

It noted that most advice resulted in a recommendation and most firms contingently charge, creating concerns that advisers may recommend a transfer to receive payment, rather than it being in the best interest of the consumer.

Furthermore, the FCA said that most consumers would not be materially harmed by remaining in their existing DB scheme and the carve-outs mean that only a small number are likely to benefit from a transfer but cannot afford advice.

The regulator expects that the ban would be effective in reducing the number of consumers who proceed to a transfer following advice and the harm that unsuitable transfers cause.

It added that it had considered the potential unintended consequences of the ban and decided it did not agree that firms will be incentivised to recommend a higher proportion of unsuitable transfers following a ban.

Additionally, the FCA said it did not believe firms would deliberately make unsuitable recommendations to remain in a DB scheme.

Several anti-gaming provisions were outlined, including its existing rules, to ensure that vertically integrated firms do not undercut other advice firms and to prevent firms receiving commission for recommendations.

The FCA stated that its anti-gaming provisions would also prevent payments to third parties.

‘Abridged advice’ will be introduced into the DB transfer market, alongside increased disclosure requirements and workplace pension comparison.

On the implementation of the new rules, firms will now need to set a total charge for their activities, for example based on the average number of hours it takes to give advice, but they also have the new option of giving abridged advice.

However, a firm may set a different level of non-contingent charges if they are not undertaking the full range of advising and related services that are normally provided alongside DB transfer advice.

Furthermore, firms may charge different amounts to different clients where there are “genuine and legitimate reasons” for the difference.

The ban comes into effect on 1 October, however those who have agreed contingent charges and started work before that date may charge contingently, providing a personal recommendation is given before 1 January 2021.

The announcement received a mixed response from the industry,

Pensions and Lifetime Savings Association (PLSA) policy lead: master trusts, Craig Rimmer, said the organisation was "pleased to see" the FCA's measures on addressing the issues around DB transfer advice and that it was "an important step in ensuring savers are given the best chance of achieving a good income in retirement.”

However, Aegon pensions director, Steven Cameron, warned that the ban "runs the real risk of further reducing access to advice on DB transfers at a time when the coronavirus pandemic arguably means for some individuals, this is needed more than ever".

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