Defined Benefit  

Advisers look to cut DB business after FCA rule change

Advisers look to cut DB business after FCA rule change

The majority of advisers are expecting to cut their defined benefit transfer advice following the regulator’s latest crackdown on the practice.

According to a poll of 1,000 advisers, carried out by Prudential, 58 per cent of advisers expect to do less or stop doing DB business altogether after the Financial Conduct Authority banned contingent charging on DB transfer advice last week (June 5).

A mere 3 per cent of those polled were looking to expand their DB transfer business on the back of the rule changes while nearly two thirds (62 per cent) of respondents were unsure whether DB transfer advice would remain profitable once the ban comes into force in October.

In general, the majority (68 percent) of advisers were unsure whether the ban would lead to better outcomes.

Les Cameron, head of technical at Prudential UK, said: “There’s a lot of detail in the statement for advisers to digest and changes needed to their processes if they want to remain in the DB market. 

“Looking at their charging models is central, but advisers also need to consider other crucial items such as whether they will offer abridged advice and if they are satisfactorily covering the option of a transfer to a workplace pension scheme, if available. 

“They should also consider the read across to other areas of advice, such as pension switching, especially around workplace pension scheme availability.”

In its policy statement last week the FCA confirmed it will ban contingent charging in most circumstances, with only consumers with certain identifiable circumstances, such as those suffering from serious ill-health or experiencing serious financial hardship, being exempt.

In the minority of cases 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 said by introducing this ban it will remove the conflicts of interest which arise when a financial adviser only gets paid if a transfer goes ahead. 

It also introduced proposals to allow advisers to provide an abridged advice process which it says “will help consumers access initial advice at a more affordable cost”. 

Abridged advice would fall outside the proposed ban on contingent charging as the regulator expects costs will be much lower and it can only result in a recommendation not to transfer.

Prudential asked advisers how their DB business had evolved since the FCA launched its consultation on DB transfers and the potential ban of contingent charging in August 2019. 

One in eight (12 per cent) said they had since withdrawn from the DB market, while a third (35 per cent) said they were doing less DB business and 43 per cent said they were doing either the same or more. 

Mr Cameron said: “Advisers haven’t got long to consider these changes. The new rules take effect from October 1, and even if the advice process is started before this, the personal recommendation must be made by January 1, which could, in some cases, be a stretch.