The FCA has announced a ban of Contingency Charging for Defined Benefit Pension Transfer, which will come into force on 1st October 2020. This long awaited announcement follows on from the FCA’s CP19/25 consultation launched in July 2019.
It comes as no surprise for many IFAs that contingency charging has been banned. However, there are many who think the FCA’s decision is controversial, because many pension scheme members will not be able to afford financial advice on one of their most important assets, their pension. The FCA have introduced a ‘carve out’ provision, designed to help the very poor or those in ill health and allowing them, if they fit a very narrow criteria, to still receive advise on a contingent basis, however, many are worried that advice will only be accessible to those who can afford it; the wealthy.
In the current uncertain times, many workers nearing retirement are finding themselves in financial peril, as they face redundancy or have been furloughed by their employers, with the government now paying the wages of 9.3 million employees. This equates to a third of the current 33 million workforce in the UK. On a daily basis we are seeing more and more companies going to the wall, with over 20,000 people being made unemployed in the last week alone.
For many people nearing retirement who have been made unemployed, the hope of gaining new employment is very unlikely. Their only option would be to take early retirement, but they may be unable to directly access their Defined Benefit pensions early or if they can, their options are not flexible enough, in which case they may want to consider transferring it first. Someone in their late 50s may not be able draw their DB pension for years. They may have been financially secure and in a well-paid job for most of their lives but now, through no fault of their own, they now find themselves without income but still having to pay bills, including a mortgage or rent.
This could have devastating consequences for them, not only financial hardship but their mental well-being too. If they are unable to secure ‘carve out’, they are unlikely to be able to afford to take paid advice on whether a defined benefit pension transfer would be in their best financial interest.
FCA New Regulations
FCA’s final rules and guidance include:
- Ban charges for advice that consumers only pay when a transfer or pension conversion proceeds, except in certain limited circumstances.
- Require firms to consider an available workplace pension scheme as a receiving scheme for a transfer.
- Enable firms to give a short form of advice (abridged advice) for free or at a lower cost.
- Empower consumers to make better decisions by improving how advisers disclose charges and requiring checks on consumers’ understanding during the advice process.
- Enable advisers to give better quality advice and improve professionalism by introducing specific continuing professional development on pension transfer advice.
- Set up new data collections that advice firms must give FSA to improve their ability to supervise the sector.
- Amend technical areas of FCA rules and guidance to clarify and extend existing requirements.