Defined Benefit  

Charging ban to cost IFAs up to £400k a year

Charging ban to cost IFAs up to £400k a year

New defined benefit transfer rules are set to cost the average advice company more than £300,000 a year as the regulator cracks down on unsuitable advice in this area.

The Financial Conduct Authority’s plans to ban contingent charging from October and to require advisers to prioritise transfers to workplace pension schemes is expected to hit advisers’ revenue, according to the regulator’s updated cost-benefit analysis.

The analysis estimates ongoing costs to the industry will amount to between £770m and £1bn a year, depending on the effectiveness of the new rules. That equates to an average of £317,000 to £434,000 per advice company.

These costs include both compliance costs arising from the regulator’s interventions and the loss of revenue for adviser businesses, stemming from the reduction in demand for and lower cost of pension transfer advice as well as reduced charges received due to more consumers transferring into workplace pension schemes.

There is also expected to be a one-off charge of approximately £35,300 for each practice, as they look to change their processes and upgrade their systems to reflect the changes.

But the FCA said consumers who receive unsuitable advice to transfer or insist on transferring suffer harm of £1.8bn each year at current pricing levels, so its interventions would be net beneficial to clients.

The ban on contingent charging in all but a few scenarios from October is expected to remove conflicts of interest in the advice process.

According to the FCA, this will result in a loss of revenue to advisers of £360m to £445m each year as a result of fewer consumers paying for unsuitable advice.

Advisers could also lose £399m to £598m in revenue each year as they look to incorporate workplace pensions in DB transfer advice processes.

This is a result of fewer consumers needing to pay for ongoing advice as firms will be able to demonstrate that a workplace pension scheme is more likely to be a suitable destination for a transfer, the FCA stated.

Compliance cost

The watchdog estimated that advisers will face one-off governance and IT project costs of £68.2m and ongoing costs of up to £500,000 each year.

There is also expected to be an industry-wide cost of around £1.1m for familiarisation when reading the new requirements, £2m in gap analysis costs and £8m in training costs.

The watchdog estimated that advisers will face one-off governance and IT project costs of £68.2m and ongoing costs of up to £0.5m each year.

There is also expected to be a total industry-wide cost of around £1.1m for familiarisation when reading the new requirements and £2m in gap analysis costs when analysing the new rules.

Firms will need to train their employees on how to comply with the new requirements which is estimated to cost £8m. 

The FCA expects around £5m of this cost will fall on small firms, £2m on medium firms and £1m on large firms.