Defined Benefit  

FCA expects contingent charging ban to shrink advice market

FCA expects contingent charging ban to shrink advice market

The Financial Conduct Authority is expecting the advice market for pension transfers to shrink even further, after proposing a ban on contingent charging.

The watchdog has suggested that its intervention may result in "some advisers withdrawing from the market and some consumers being unable to afford or access advice on whether to transfer".

In a consultation paper published this morning (July 30) the watchdog stated that given the advantages of defined benefit pensions, the proportion of consumers being advised to transfer out was too high.

The regulator believes many of the transfers that have taken place will not have been in consumers’ best interests.

Therefore the FCA is proposing a ban on contingent charging, with the exceptions of specific groups of consumers in certain identifiable circumstances, such as people suffering from serious ill health or experiencing serious financial hardship.

But in these instances advisers will have to charge the same amount, in monetary terms, for advice to transfer as they charge when the advice is non-contingent.

The FCA has also proposed introducing a new type of low-cost advice which will be exempt from the contingent charging ban: abridged advice, which will filter out those consumers for whom a pension transfer is unlikely to be suitable before they pay for full advice.

Abridged advice will include the initial stages of the usual advice process, such as a full fact-find, but it cannot result in a recommendation to transfer. 

If the rules are implemented, the regulator is expecting the market for defined benefit transfers advice to contract, at least in the short term.

Part of the watchdog's proposals also include the expansion of the range of data that it currently collects from advisers to allow the FCA to monitor the capacity within the advice market.

This is not the first time the FCA warned of a reduced advice market in the defined benefit transfer market.

In April, the regulator’s board backed the Financial Ombudsman Service compensation increase because it would create a "more focused" advice market.

The watchdog is also proposing that advisers improve their charges disclosure before the advice process starts.

The FCA said that in the file reviews it conducted, it found poor levels of disclosure. For example, 61.7 per cent of files were non-compliant on disclosures and communications with clients.

The disclosure failings were driven in part by failings in firms’ standard documentation, particularly in the way they present initial and ongoing fees, the watchdog noted.

Due to this, the regulator is proposing that advice and product charges are disclosed in suitability reports, which will make “consumers better informed of the potential consequences of transferring or converting their pension”.

Before concluding the advice process, the FCA is also proposing that advisers check that consumers have understood the benefits and risks of their proposed action.

Christopher Woolard, executive director of strategy and competition at the FCA said: “The FCA’s supervisory work has revealed continued problems in the pensions transfer advice market.