The cost of offering defined benefit pension transfer advice is set to soar by up to £10,000 per pension adviser in just the first year of proposed new rules being introduced.
On Monday (26 March) the Financial Conduct Authority (FCA) published plans to overhaul pension transfer advice, including how advisers charge for what is increasingly becoming the mainstay of many of their businesses.
The watchdog is considering a ban on contingent charging that makes payment for advice dependent on the client going through with a pension transfer, the introduction of new qualifications for advisers and obliging firms to produce suitability reports even when the recommendation is not to transfer.
All of these new requirements will have an impact on firms' expenses, as the FCA explained in its costs and benefit analysis.
The proposal that pension transfer specialists also have qualifications for advising on investments – which would mean they would have to obtain level four post-Retail Distribution Review qualifications on the subject – will have a one-off examination cost of £750.
The regulator also estimated the additional qualifications will require 100 hours of additional studying, which multiplied by an average hourly cost per adviser of £40, will represent a bill of £4,000.
Darren Cooke, a chartered financial planner at Derbyshire-based Red Circle Financial Planning, is surprised that this level of qualification isn't already required in order to advise on defined benefit pension transfers.
He said: "Anyone advising on pension transfers or checking and approving them should be qualified to at least diploma (level four) and also hold a specialist qualification in pension transfers as a bare minimum."
The FCA is also proposing that firms provide their clients with a suitability report regardless of the outcome of advice - which is set to impose the biggest new cost on pension advice firms.
The regulator stated: "We consider that it is important for consumers to receive a suitability report that summarises the issues, regardless of the conclusion.
"They will also have a record of the reasons why remaining in a safeguarded benefits scheme is the most suitable outcome for them."
This activity alone is expected to create an additional expected cost of £6.6m to £10m per year, every year, according to the FCA.
With some 5,000 active pension transfer specialists in the UK market, at the higher end of the FCA's estimate this will mean every one of them paying an ongoing yearly bill of up £2,000 to now create reports even if the recommendation is for the client to take no further action.
For firms, this annual figure will increase depending on the number of pension transfer specialists they employ.
Adding to this there is also the cost of updating processes for the suitability reports, a one-off expense, which the FCA estimated at £1,000 per firm.
The FCA is also proposing that advisers should explore each client's attitude to the risks associated with a transfer, in addition to their attitude to investment risks.