'Elephant in the room': Advisers hopeful new FCA rule will tackle exit fees

'Elephant in the room': Advisers hopeful new FCA rule will tackle exit fees

Industry professionals and advisers have mixed feelings about the Financial Conduct Authority’s proposal for a new consumer duty, and whether this will put an end to high exit fees.

Last month, the FCA set out plans for a new consumer duty, designed to create a higher level of consumer protection in the retail financial services market. 

Currently, firms are bound by FCA rules and principles to treat customers fairly which include offering products and services at fair prices.

However, in a statement in May, the FCA said it had seen evidence of practices that cause consumer harm, including firms providing information which is misleadingly presented or difficult to understand.

But the proposals also included a line on exit fees charged by firms when their customers leave them.

The FCA said there were certain “essential conditions for competition to work effectively and for consumers to be able to take responsibility for their financial decisions” and these were hindered by practices such as “barriers to exiting from a product/service or which exploit information asymmetries, behavioural biases or vulnerabilities.”

It stated: “We also see products and services that are designed with features that can deter consumers from acting in their interests. For example: unreasonable exit fees which discourage consumers from leaving products or services that are not right for them, or accessing better deals, sludge practices that discourage exit, for example requiring customers to go into a branch to close a product.”

Tim Morris, IFA at Russell & Co Financial Advisers welcomed the regulator's spotlight on exit fees.

He said: “The FCA consumer duty certainly sounds like an important step in the right direction. Exit fees have been the elephant in the room for too long. 

“They are against the spirit of pension freedoms. Consumers should not be penalised to access their money.”

Likewise, Philip Milton chartered wealth manager at Philip J Milton, said exit fees needed to be tackled but he was more reserved as to whether the new duty would achieve what it sets out to do.

He said: “The elephant in the room is the unacceptable concept of deferred initial charges levied as withdrawal penalties.

“These should be banned as they are manipulative and hide the real cost from the customer."

But he added: “Is it simply more bureaucracy, more undefinable standards when the real villains, especially the unregulated, are not being prosecuted?"

Ricky Chan, director and chartered financial planner at IFS Wealth & Pensions, said he hopes the duty will solve the problem of exit fees, but thought firms might still find a way around them.

Similarly to Milton he said some firms “get around these exit fees” by treating them as deferred initial adviser fees.

He said: “If this practice of going against the spirit of regulation is allowed to happen again, then I have no faith in the FCA implementing any new measures.”

Dennis Hall, founder at Yellowtail Financial Planning, believes the new duty will not immediately solve the problem of exit fees but argued the FCA should still implement the rules.