The Contingent Charging Ban

  • 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.

Related reading

Raising the Normal Minimum Pension Age from 55 to 57

The government’s recent consultation proposes a change to the Normal Minimum Pension Age (NMPA) from April 2028. The publication has raised some questions about the proposed protection regime. The paper proposes…

Read more >

ESG: A closer look at the coming changes for Advisers

I need to kick off by confirming some of the assumptions that support this article.  When I refer to new rules, these rules do not actually exist yet. Unless the…

Read more >


The lang cat host HomeGames #42 with Bill Vasilieff

18 March 2021

From the lang cat: Our guest on HomeGames today was a legend of the platform sector. Bill Vasilieff was there for Selestia in the early days, and then set up…

Read more >


How efficient was your business at tax year end?

30 March 2021

Advisory firms work hard for their clients at Tax Year End, advising on how to make the most of their family tax allowances. With the dust settling, however, you might…

Read more >

In the Media

Novia deal with Anacap a ‘meeting of minds’

18 December 2020

The chief executive of Novia has described the platform’s deal with private equity firm Anacap Financial Partners as a “meeting of minds”.

Read more >


Quarterly and Tax Year End Updates

15 March 2021

It’s been a fast first quarter and we’ve brought in quite a few improvements in a short space of time. To ensure you’re up to speed with these developments, we’ve…