Q1 – Do you have any comments on the intended commencement dates of our proposals or the draft Handbook text set out in Appendix 1?
Yes – they seem too soon for companies involved in this very complex area to make the relevant changes to processes etc, particularly given the timeframe a DB transfer takes (around 6 months on average).
Q2 – Do you agree that a ban on contingent charging is likely to be effective in reducing the numbers of consumers receiving unsuitable advice? If not, how would you suggest we effectively reduce the numbers of consumers receiving unsuitable advice? Do you think we should address the conflict of interest issues differently?
I think the first point that needs to be made is that the assumptions being made by the FCA, that 69% of enquiries proceeding and 50% unsuitable, is flawed.
It needs to be seen within the context that only around 1% of DB members eligible to transfer have done so.
Taking the example of my firm, over the last 12 months I have received 2,838 enquiries (letters of authority), of which I have only recommended a transfer to 725, which equates to just over 25%.
Therefore, I don’t see the need to ban contingent charging, given my own evidence.
If you do proceed with the ban, the numbers of consumers receiving advice will go down because a significant number of people will no longer be able to afford to pay for it.
No, the ban will not reduce unsuitable advice, in fact, we believe it will probably go up as a result of the ban, although other measures being proposed will negate some of that increase.
We are very concerned that the outright ban on contingent charging could have very significant unintended consequence in two significant ways.
1. The new rules remove any incentive to provide anything other than a negative recommendation.
Under the proposed new rules, the adviser fee must be the same irrespective of whether the transfer proceeds and is applicable whether full advice is ‘positive’ or ‘negative’. However, a positive recommendation and subsequent transfer results in added risk for the adviser, as well as substantial extra administration costs. In addition, PI costs are directly linked to the numbers of transfers actually transacted.
On top of that, PI insurers generally limit the number of DB transfers an IFA can complete in a year. An IFA firm will almost be forced to recommend against transfers if they are getting close to the number their PI insurer has stipulated, particularly as they will still be paid the same by the client.
2. We feel that the majority of consumers seeking pension transfer advice are doing so because of pre-conceived reasons e.g. ‘I want greater flexibility / control of my money’ or ‘I want my family to receive 100% of the fund’. The expectation on the part of the consumer, particularly when paying for the advice ‘up-front’, will be that this entitles them to transfer irrespective of whether the IFA concludes that this is advisable or not.
IFA’s will therefore feel pressured into making a positive recommendation whilst, given the huge influence of online review websites such as Trustpilot, terrified of making a negative recommendation. Furthermore, it will make it extremely difficult for IFA’s to refuse an insistent client instruction because of reputational damage caused with unhappy and dissatisfied consumers if they are being forced to pay for something and then, in their eyes, not getting what they paid for.
Banning contingent charging removes the (possible) conflict of interest that this fee structure presents. However, the focus of all DB transfer advice should be on the individual client and their circumstances, needs and objectives and we believe that the proposed rules will potentially worsen this.
If you insist on going ahead with the ban and therefore increasing the likelihood of poor consumer outcomes AND access of advice for less wealthy individuals, then a way of mitigating some of this problem would be to allow contingent charging for ‘big’ companies – particularly transfer bureau’s, that don’t pay their individual Pension Transfer Specialists on a contingent basis and are not dependant on any one transfer proceeding.
The RMAR return could simply have a ‘tick-box’ to declare their firm is exempt under the large firm rule, which then moves the firm into a stricter form of reporting including the requirement to prove there is no conflict of interest. There could, for example, be additional requirements to demonstrate the PTS are only rewarded for the quality of their work, not the quantity, together with their own personal rates of positive / negative outcomes.
This would inevitably help to further reduce the number of firms carrying out this type of work and allow the FCA to focus their attention on the bigger specialist firms, whilst maintaining access to advice for the lower earners who might otherwise be pushed towards the ‘scammers’.
Smaller IFA’s, who may only do a handful of transfers themselves but combined make up a significant proportion of all transfers completed, would be far more likely to introduce clients to a specialist transfer bureau service that are able to charge on a contingent basis and who would have increased monitoring from the FCA.
We believe some of the other measures the FCA are proposing will go towards reducing unsuitable advice by way of far better and upfront disclosure of charges.
Q3 – Do you agree that the way in which we have set out the ban should be effective and adequately reduces scope for gaming? If not, how should we amend it?
No, for the reasons set out above.
Not banning contingent charging is the only way we can see you avoid such scenarios and poor consumer outcomes.
Q4 – Do you agree with the scope of the proposed carve-out and our proposals for monitoring its use? If not, how would you change it?
No, it is set far too high. Expecting a client to demonstrate that they are already in debt arrears when providing advice ignores the fundamental issue that a DB transfer can comfortably take up to 6 months. Many clients by that time could already be subject to legal action, bankruptcy proceedings or even at risk of losing their homes due to rent or mortgage arrears.
There is even a risk that changing circumstances could virtually negate the reason to transfer in the first place, thus potentially placing a firm at greater risk of a claim against them.
An unintended consequence could also be that consumers feeling “forced” to go into arrears in order to achieve the required criteria for contingent advice to be applicable. The carve-out should therefore be based on affordability, like a mortgage application. This can be demonstrated very easily within the fact find, with an additional statement signed by the consumer confirming their inability to pay and desire to proceed on a contingent basis.
Q5 – Do you agree with our decision not to propose a price cap? If not, how could the shortcomings of a price cap be overcome?
Yes. If every other part of the advice process is disclosed properly and consumers are put in an informed position, that should include their ability to decide what they are prepared to pay.
Q6 – Do you agree that changes to our existing conflict of interest and accountability rules would not effectively address the harm to consumers occurring in this market? If not, what changes to systems and controls would be most effective?
No, we don’t agree. We think additional factors can be looked at in terms of the remuneration package in place for the PTS and all those included in the process of giving advice.
Q7 – Do you agree that separating responsibility for transfer advice potentially has unintended consequences that may not be in clients’ best interests? Are there any ways in which a separation of advice or independent checking of transfer advice could work effectively?
This simply doesn’t work. The advising firm must be responsible for their advice.
Q8 – Do you agree that banning percentage charging is unlikely to have a significant impact on consumer outcomes? If not, how could it be used effectively?
Q9 – What are your views on the potential for ‘scheme pays’, changes to the pension advice allowance and partial transfers to improve the quality of advice or address conflicts of interest adequately, or both?
Whilst the idea of ‘scheme pays’ would be a good idea, we think, in practical terms, the additional administration costs of it would be too burdensome and would not address the problem of bad advice anyway.
Q10 – Given the time frames that apply to guaranteed transfer values, what are your views on the need to provide guidance to members considering a pension transfer? Should guidance be mandatory and, if so, who should deliver it?
Effective guidance should be provided by advice firms, therefore if there is a requirement for advice it can be provided. We’re not sure it should be mandatory.
It can be provided in the form of Triage, like that laid out by the PFS Gold Standard.
If it is to be made mandatory then it could be provided by the scheme trustees, in a standardised form agreed by the FCA, as soon as they receive a request for a transfer value but BEFORE they have issued any figures.
Time must be given for a consumer to read and digest this information before the clock starts ticking on any guarantee dates.
Q11 – Do you agree with our additional guidance on triage services? If not, please indicate alternative ways of addressing the issue.
See my answer above.
Q12 – Do you agree with that our proposed abridged advice service will enable firms to provide a low-cost alternative to full advice for those consumers that need it? If not, how would you suggest we amend it?
Whilst this would be low cost, it would also be almost entirely pointless from the consumers point of view if you don’t know any information about the pension in question.
Whilst you could still only provide a recommendation against and need to pay for full advice, the provision of some basic benefit information would give the consumer a better idea whether they want to proceed to full advice or not. It would also provide ‘context’ when explaining risk of transfer compared with the default position of leaving benefits where they are.
Consumer could already have a TVC (TVAS) from elsewhere and could ask any insurance company for a transfer-in illustration, it would therefore be far better this information is provided by a regulated firm with a PTS available to answer any question or clarify any points.
As well as providing simple generic information about the disadvantages and implications of transferring, we believe that clients should also be provided with a summary of the ‘value’ of their specific scheme benefits.
These figures, along with the explanation of these and the contents of the triage document itself, could be almost entirely prescribed if needed.
Our suggestion would be to include a projection of the members future benefits to the schemes NRD, both with and without tax free cash. This is instead of the ‘current’ value of benefits they may already hold (although infrequently provided), which are likely to be misleading given the variation in revaluation rates in deferment. Also, the TVC, the critical yield and potentially a simplified cash-flow comparison should be provided.
The TVC should be framed as a means of demonstrating the ‘true’ value of the projected benefits and compared to the current transfer value – this would give even the most unsophisticated consumer an easy to understand comparison.
The Critical Yield should be compared to a standardised benchmark growth rate to demonstrate the issue of investment risk.
Finally, the cash flow comparison would demonstrate to the client the fundamental risk of exhausting their pension pot on transfer e.g. ‘if I draw an income equivalent to what the fund would have paid me, this is how long until the money runs out’.
All these calculations are produced by a basic Transfer Report, which can be carried out relatively simply and cheaply. Consumers may already have some of these details anyway, as explained above, so it would be better to allow it from a regulated source with a full and standardised explanation.
This process thereby provides a low, or even no-cost option, so that consumers can decide if they want to proceed with ‘full’ advice. Significant numbers of DB transfer enquiries are merely consumers wishing to establish what their future benefits will be and whether the transfer option represents good value or not. It is therefore fair to assume that most of these will decide not to proceed any further at this point (unless the transfer value appears generous based on the aforementioned comparisons).
As such, not only would this significantly reduce the number of transfers at a very early stage, it would also better enable those on very limited incomes to decide whether they wish to commit to additional and far more significant costs.
Q13 – Do you agree that requiring firms to demonstrate that an alternative scheme is more suitable than a WPS is the most effective way to reduce the numbers of consumers being transferred into schemes that do not meet their needs and limit unnecessary charges paid? If not, how would you suggest we address this issue more effectively?
Quite simply, comparing a proposed new product’s charges with their current Workplace Scheme doesn’t work for everyone. It may be that although they have access to such a plan, they have decided to opt-out, or they have older plans that they may have even forgotten about. Most importantly, even if they don’t currently have access to a WPS e.g. they are one of the millions of self-employed, unemployed or retired consumers, they could easily go and set up their own low-cost arrangement.
We don’t think it is necessary to compare with a WPS because full and upfront disclosure of charges should provide all the necessary information for an informed decision.
Our concern would be that consumers that do transfer into a WPS are less likely to seek investment advice as it will need to be paid for out of taxed income, rather than ‘adviser charging’ mechanism within the scheme; this will lead to most staying within the default fund which, for many will be appropriate, however, larger funds being transferred in are less suitable to this type of investment strategy.
However, if the FCA do end up moving forward with this they would be better to ALWAYS compare, whether you have one or not, with a generic 0.75% charge contract (like RU64).
The comparison with the recommended product is shown side by side and in an easy way to understand, as CP 19/25 stipulates. That way everyone, without exception, gets to see the effect of a low charge plan compared with whatever is being recommended.
Q14 – Do you agree with our proposals for requiring the disclosure of charges in engagement letters? If not, please indicate what alternatives should be considered.
We believe the current system works and the improved requirement within the suitability report should help improve consumer understanding.
Q15 – Do you agree with our proposals to introduce a one-page summary at the front of a suitability report? If not, please indicate what alternatives should be considered to improve disclosures to consumers.
Q16: Do you agree with our proposal to require that suitability reports are always provided before a transaction is undertaken?
Q17 – Do you agree with our approach to checking that the client has a reasonable understanding of the risks of proceeding? If not, what alternative approaches might achieve the same outcome?
Q18 – Do you agree with our proposals to introduce CPD requirements for PTSs? If not, what other approaches could be used to help PTSs maintain knowledge
Yes, however, we think this can also be demonstrated with in-house training logging of work quality by the compliance department. The problem would be that firms who specialise, given no changes in legislation, just how much CPD can be done when nothing changes?
Q19 -Do you agree with the data we propose to collect in RMA-M? If not, what amendments would you suggest?
No, too frequent.
Q20 -Do you agree with the data we propose to collect in RMA-E, FSA031, FSA032 and FIN-APF? If not, what amendments would you suggest?
Q21 – Do you have any comments on the proposed guidance for completing RMA-M and revised guidance for completing RMA-E, FSA031, FSA032 and FIN-APF?
Q22 – Do you agree with our proposed changes to the pension transfer definition?
Q23 – Have we identified all the protections that would be lost for some categories of pension transfer and addressed these adequately?
Q24 – Do you agree with our proposed changes and clarifications to the TVC rules? If not, how could we change our approach?
Q25 – Do you agree with our proposed changes when cashflow modelling is used in an APTA? If not, how do you suggest we amend it?
Q26 – Do you agree with our approach of clarifying that retirement annuity contracts should be treated in the same way as contracts with guaranteed annuity rates? If not, please state why.
Q27 – Do you agree with our proposed guidance on how advisers should give advice when only an estimated transfer value is available? If not, how would you change it?
Q28 – Do you agree with our proposals to amend the application of the adviser charging and inducement rules to include advice on pension transfers and conversions in all circumstances (other than the proposed exclusion of an “employer funded pension advice charge” from the application of the adviser charging rules)? If not, please state why.
Q29 – Do you agree with the change in application of COBS 19.1 to capture arranging a transfer or conversion? If not, please explain why.