The Financial Conduct Authority has today outlawed contingent charging on defined benefit transfers but there are two exemptions.
The regulator has agreed with the pensions industry there are certain circumstances where a DB transfer is in an individual's best interest and will result in the best outcome for them.
In particular, individuals suffering from serious ill-health or those experiencing serious financial hardship might benefit from a pension transfer, it said in its policy statement this morning (June 5).
But the FCA warned any adviser who wants to rely on a carve-out for a client must ensure the client meets the requirements as set out by the rules.
The FCA said: "We identified that there are a small number of vulnerable consumers who may benefit from a pension transfer, but cannot afford to pay for advice.
"To ensure that our proposed ban on contingent charging does not disadvantage these groups of consumers, we proposed that they may continue to be charged on a contingent basis."
For those in serious ill-health the FCA will allow clients to self-evidence their condition. For example, evidence could be existing documentation from a registered medical practitioner, including details of treatment.
This comes after the regulator recognises it is impractical to expect clients to get evidence of limited life expectancy from a medical practitioner.
The regulator also changed its rules around the serious financial difficulty carve out to allow for a lower threshold.
Advisers will now have to evidence that a client is unable to pay for full pension transfer advice.
This can be based on guidance from the Money and Pensions Service that says a person in serious financial hardship is defined as someone who finds keeping up with domestic bills and credit commitments a heavy burden and who has missed credit or domestic bills in three or more of the last six months.
In some cases, an individual would qualify for the exemption if financial difficulties are caused by the circumstances of household dependants, such as having to pay for care.
However, a person would not qualify if their financial hardship was caused by non-essential expenditure, for example, to maintain a certain lifestyle.
Clients who have accessible funds to pay for the advice, but would prefer not to use their savings and investments or income to do so, would also not be eligible.
The FCA said advisers should find it easy to access information needed to assess eligibility for the carve-out “as it is similar to the information they collect as part of getting to know their customers when giving advice on a pension transfer”.
There is also a requirement that where contingent charging is permitted, advice firms 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 will be collecting data on firms’ use of carve-outs and the number of transfers that are carried out due to these exemptions as part of its supervisory work.
Steven Cameron, pensions director at Aegon, said: “Clarification on those individuals eligible for ‘carve outs’ from the ban are welcome and we hope this may alleviate the issues for some individuals.
“We may see an increase in the number of individuals eligible on grounds of serious financial difficulty as a result of the financial implications of Covid-19.
“We also support a carve out for those with life shortening medical conditions and welcome the move to allow this to be self-certified rather than requiring specific evidence from a medical professional.”
However others said the carve outs are too broad and leave too much to advisers’ own judgment.
Keith Richards, chief executive of the Personal Finance Society, said: “It is often very difficult to predict the precise impact of poor health on longevity, and these rules will put advisers in a position where they have to make a judgement on client’s health that could either leave the client disappointed, or create issues with compliance with the FCA’s rules.”
amy.austin@ft.com
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