The goals outlined by the FCA in this paper are commendable in attempting to address the considerable risk of the DB transfer market and the undoubted ease with which some unscrupulous firms can operate in this area.
Although a lot of what is being proposed is doubtless already applied by the more established and reputable transfer specialists, any additional rules to enhance consumer protection and help consumers make informed decisions, can only be a good thing.
Whilst we don’t agree with banning contingent charging, largely because it will deter or even outright prevent those most in need of low-cost advice from receiving it, we also don’t believe its banning will necessarily address the core issues that have led to poor consumer outcomes, however, we cannot see this central requirement of CP 19/25 being rescinded by the FCA.
As such, our suggestions are primarily designed to add to the efficacy of the proposals:
Unregulated investments
A significant motivation for an IFA to proceed with a transfer is the opportunity to then receive excessive fees from unregulated investments and it is our opinion that these should be banned. Whilst the FCA say it is “not quite so simple”, as stated by its chairman, Charles Randell, we do not see why the FCA cannot issue a list of permitted investments or require firms to register with the FCA the investments they want to use, if not regulated? Similar to how it was when HMRC was directly responsible for SIPP and SASS investments.
Triage
As well as providing generic advice about the disadvantages of transferring, we believe that clients should also be provided with a simple summary of the ‘value’ of their benefits. These figures, along with the explanation of these and the contents of the triage document itself, should be almost entirely generic and prescribed.
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, which are likely to be misleading given the variation in revaluation rates in deferment. Also, the TVC, the critical yield and finally 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 member an easy to understand comparison. The Critical Yield should be compared to a standardised benchmark performance 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 these details anyway, possible from a TVC/Transfer Report from a non-regulated source, so it would be better to allow it from a regulated source.
The Triage then facilitates a low or even no-cost option for informed consumers to decide if they want to move forward towards abridged or full advice – not only would this significantly reduce transfers at a very early stage, because of the personal nature of the information, it would also better enable those on very limited incomes to decide whether they wish to commit to additional and far more significant costs.
Carve-out
Although the consultation paper does not go into detail on this, we feel that broadly the carve out ‘bar’ is set 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.
The carve-out should therefore be based on affordability, like a mortgage application. This can be demonstrated 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.
Allowing contingent charging on a limited basis
We are very concerned that the outright ban on contingent charging could have one very significant unintended consequence; it removes any incentive for advisers to provide anything other than a negative recommendation.
Under the proposed new rules, the adviser fee must be the same and is applicable whether full advice is positive or negative and whether the transfer proceeds or not. However, a positive recommendation and subsequent transfer results in added risk for the adviser, as well as substantial extra administration costs. On top of that, an adviser that transacts relatively few transfers will have significantly lower PI costs!
As such, it is easy to foresee a scenario whereby unscrupulous advisers will provide abridged advice, unofficially suggest to the consumer that the full advice outcome will likely be a positive recommendation, so it is worthwhile committing to the cost of this, but with the inevitable ‘negative’ conclusion then leaving the consumer with a significant bill to pay, potentially limited means of doing so and an adviser prepared to pursue them through the courts to receive settlement. At the same time, the advice they have received is highly questionable and as no transaction has taken place, proving this would be virtually impossible, leaving almost no means of seeking recompense. This is the opposite of improving consumer outcomes.
As such, we would propose allowing contingent charging for ‘big’ companies that don’t pay their individual Pension Transfer Specialists on a contingent basis. 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.
Ongoing charges / workplace pension comparisons
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 get something similar.
Surely it 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, it is then up to the adviser to justify their higher charge contract and demonstrate why their additional fee is worthwhile. It is then very clear for the consumer to decide if they want to proceed on that basis or ask the adviser to further investigate the potentially cheaper option.
This will improve consumer outcomes FOR EVERYONE and prevent further potential delays in an already very lengthy process, by avoiding the need to try and get detailed information from the WPS.
Reference: https://www.fca.org.uk/publications/consultation-papers/cp19-25-pension-transfer-advice