Emma Ann Hughes highlights five things you must know about the FCA’s pension transfer paper
The Financial Conduct Authority’s (FCA) latest package of pension-related proposals grabbed headlines, as it included proposals to ban contingent charging.
But the 162-page consultation paper has far wider implications for financial advisers .
It contains plans to introduce a pension advice cost template, plus the regulator revealed plans to tackle advisers receiving ongoing fees.
Here are the five key things you need to know about the consultation paper, titled Pension transfer advice: contingent charging and other proposed changes, and what it means for the way you work.
1. Bans and brevity
The FCA states that the proposed ban on contingent charging would apply unless consumers have specific circumstances that mean a transfer is likely to be in their best interests.
The City watchdog is also looking to address the conflicts of interest that arise when a financial adviser advising on a pension transfer stands to receive ongoing fees – which in some cases can be for 20 to 30 years following
the transfer.
In terms of advice delivered, the regulator is proposing to introduce ‘abridged advice’ in relation to pension transfers and conversions.
Abridged advice will act as a new mechanism to filter out those consumers for whom a pension transfer or conversion is unlikely to be suitable, before they pay for full advice.
As abridged advice – which must be carried out or checked by a pension transfer specialist – cannot result in a recommendation to transfer, the FCA claims conflicts of interest are reduced.
According to the FCA, abridged advice includes the initial stages of the usual advice process.
This means the regulator expects the adviser to conduct a full fact-find, including an assessment of the client’s attitude to transfer risk in line with our guidance on assessing suitability.
2. Stay or go?
The FCA will require firms to demonstrate why the scheme they recommend is more suitable than a workplace pension scheme. Firms will also be required to include analysis of a transfer into the default arrangement of an available workplace pension scheme in the appropriate pension transfer analysis, which provides the evidence for the suitability report.
The FCA will require firms to demonstrate why the scheme they recommend is more suitable than a workplace pension scheme
3. Letter of engagement
Before advice firms provide regulated advice on a transfer or conversion requiring a pension transfer specialist, the FCA proposes they must send a letter of engagement that sets out, in monetary terms, the amounts that would be paid under various conditions.
For full advice, the adviser must make it clear that the amount is generally payable irrespective of whether the advice is to transfer or to convert and a transaction takes place.
The amount of ongoing adviser charges that would be paid each month in the year following a transfer or conversion if funds remained invested, making no assumptions about growth but allowing for the cost of initial advice, must also be disclosed.
If the first-year charges would be significantly lower than subsequent years charges, the letter should indicate the charges in subsequent years until normal charging levels are reached.
If an adviser operates the carve-out and knows that a potential client would be eligible for the non-contingent charging, the letter must explain the reasons for this and specify that no charge would be payable in the event of a recommendation not to transfer or convert.
4. Side of A4
The regulator also proposes that advice firms will have to produce a one-page summary at the front of all transfer and pension conversion suitability reports requiring a pension transfer specialist.
The summary, which the FCA states should be limited to one side of A4 if printed, must outline charges, the adviser’s recommendation, a statement of the risks associated with the transfer of a pension or pension conversion, plus what ongoing advice will be provided.
The client must be informed that they are not required to take this ongoing advice service and that they may cancel at any time.
The monthly and annual charges associated with this service must also be disclosed in pounds and pence. The client must be invited to provide a signature on the one-page summary to confirm their understanding.
If the client declines to sign the summary to confirm their understanding, then the adviser should not make a recommendation to transfer.
According to the FCA, this would be justified on the grounds that the client does not appear to have the relevant knowledge and experience.
5. Look outside for CPD
Pension transfer specialists will have to undertake a minimum of 15 hours of continuing professional development (CPD) each year, focused specifically on pension transfer advice, if the FCA’s proposals get the go-ahead.
This would be in addition to any other existing CPD requirements for other types of advice.
At least five of the 15 hours must be provided by resources external to any firm that employs or contracts services from the pension transfer specialists, according to the consultation paper.
The FCA states: “This will ensure that a pension transfer specialist is not just receiving a ‘house view’ of the market. We believe that this is a proportionate way to address any skills shortfall or out-of-date knowledge that might exist.”
Emma Ann Hughes is director of communications at the CII
