The scandal of members of the British Steel Pension Scheme receiving terrible advice to transfer to private pensions and place money in dodgy investments may have been the tip of the iceberg.
Unsuitable pension transfers have certainly been the focus of the financial press in recent years, and increasingly the subject of regulatory scrutiny too.
Moving from the certainty of a guaranteed income for life to a capital sum, which is subject to investment risks, is no easy decision to make.
While most financial advisers operate professionally and impartially when advising on pension transfers, a minority have given the regulator cause to update their guidance and introduce new rules, all with consumer protection in mind.
The latest package of measures from the Financial Conduct Authority (FCA) includes a proposed ban on ‘contingent charging’ for pension transfer advice.
Contingent charging is a remuneration style where the financial adviser is only paid if they recommend the pension transfer takes place. Critics of this approach to charging believe it can introduce a conflict of interest, resulting in a higher propensity for unsuitable advice.
By introducing a ban on contingent charging, the FCA aims to protect consumers from this conflict of interest.
It’s not, however, a complete ban on contingent charging; advisers can still make use of this method of charging on pension transfer advice in limited circumstances.
Where an individual has an illness or condition which results in a materially shortened life expectancy, contingent charging can still take place, to facilitate access to advice for this group of investors who could benefit from transferring their pension.
An exemption also applies to those who may be facing severe financial hardship, including the risk of losing their home. Individuals facing severe financial hardship will continue to have the option of paying for pension transfer advice using contingent charging.
For all other groups of consumers, contingent charging is taken off the table as a result of these new FCA proposals.
Advisers will not be allowed to charge less in total for advice on pension transfer than if they provided and transacted investment advice for the same size of non-pension investments.
This measure is designed by the FCA to prevent advice firms from gaming the contingent charging ban by charging a token fee for their advice.
Advisers will also be banned from offsetting charges for advice on pension transfers against other advice services provided to the client.
There will be a limit on any subsequent ongoing adviser charges in respect of the pension funds that are transferred. This measure is designed to make sure that ongoing charges are no higher than if the funds had not been subject to a transfer, therefore limiting the opportunity for cross-subsidies between initial and ongoing advice on transfers.
To ensure that ongoing fees are not excessive, advisers will have to demonstrate why any pension scheme they recommend is more suitable than the individual’s workplace pension scheme.
Finally, advisers will have to charge for advice where any services related to full pension transfer advice have taken place, including the appropriate pension transfer analysis and transfer value comparator.
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.
Other measures being introduced by the FCA around pension transfers include introducing abridged advice, allowing advisers to deliver low-cost advice to clients who should not transfer their final salary pension.
There will be an improvement to the way in which charges are disclosed, and advisers will need to take steps to confirm that clients understood their advice explicitly.
Advisers will also have to complete a minimum of 15 hours of continuing professional development specific to pension transfers, to retain regulatory permissions to be a pension transfer specialist.
This FCA consultation on improvements to pension transfer advice will remain open until the end of October.
Here at Informed Choice, we believe that contingent charging is akin to commission and should have been banned by the FCA back in December 2012, at the same time the ban on retail investment commissions was introduced by the Retail Distribution Review.
When an adviser is only paid if they recommend a positive course of action, it’s bound to introduce bias to the process, which clouds the judgement of the adviser and creates a strong financial incentive to recommend a transfer to a new product, irrespective of suitability.
That’s not to say all financial advisers operating a contingent charging structure are delivering unsuitable advice; we’ve no doubt that some are able to navigate these conflicts of interest and continue to act in the best interests of their clients, even if it leads to other clients effectively cross-subsidising this ‘free’ advice.
We look forward to seeing the FCA take this robust stance when it comes to pension transfers – something they should have introduced years earlier, before a great deal of damage was done.