The Contingent Charging Ban

the-contingent-charging-ban-what-advice-is-suitable
  • Author : Novia Financial
  • Date : 23 Jul 2020

The regulator has published its awaited policy statement PS20/6  and a number of changes are to be implemented later this year.  What are the new rules that will ban contingent charging on Defined Benefit transfers and will they reduce potential conflicts of interest?

The regulator has delivered its awaited policy statement to the industry. This is a topic which has created significant debate. PS20/6 sets out the new rules that will ban contingent charging on Defined Benefit (DB) transfers, to bring about suitable pension advice for clients and to reduce conflicts of interest from an Adviser only being paid if the transfer goes ahead. From 1 October 2020 a recommendation to stay in a DB scheme must be charged at the same rate as a recommendation to transfer.  However, those who have agreed contingent charges and commenced advice work beforehand may charge contingently, providing a personal recommendation is given before 1 January 2021.

There are exceptions to non-contingent arrangements for vulnerable clients. The FCA has provided carve-outs for individuals in specific circumstances (reduced life expectancy to under 75 and serious financial hardship) with the aims of ensuring customers who are likely to benefit from a transfer are able to afford the advice necessary to make this happen.

Furthermore, the FCA have 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.

Firms will also be expected to keep up to date records on those clients who meet the carve-out and should be prepared to evidence why these clients qualified for contingent charging.

 

Ongoing charges

The regulator recognises that even with a ban on contingent charges, high ongoing charges will still represent an incentive to recommend a transfer. They want to stop advisers from recommending expensive and complicated solutions that their clients do not really need. Their solution to this is to require advisers to now consider an available workplace pension as a receiving scheme for a transfer and, if they recommend an alternative solution, demonstrate why that alternative is more suitable by comparing the recommended receiving arrangement to the Workplace Pension Scheme (WPS) that is available to the client. Originally, they had consulted on challenging advisers to demonstrate that their proposed solution was at least as suitable as the WPS. But in the final rules they have upped the ante – advisers will need to show that the SIPP is more suitable than the WPS. This will likely include the adviser demonstrating that the client needs ongoing financial advice, which the WPS is unlikely to cater for.

 

Abridged Advice?

Only two outcomes can be advised under this process: remain in the scheme or that it’s unclear if a transfer is suitable or not.

This is a new level of advice, introduced to help clients access initial advice at a more affordable cost. It can recommend staying in the DB scheme but cannot result in a personal recommendation to transfer. It takes into consideration the personal circumstances of the customer, and so it sits on the advice side of the perimeter – but it can only look at the customer and the features of the existing scheme. If the adviser wants to incorporate the receiving arrangement into the recommendation, this will be full advice.

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