Contingent charging is a sticky problem. If advisers don’t get paid for telling a client to keep their money where it is but do get paid if there is a transfer, how can we say for certain that their transfer recommendations are in the best interest of those clients? With contingent charging commonplace, this potential for conflicts of interest could put consumers at risk of bad outcomes. But slap a ban on it and you take away the transfer value as the client’s source of cash for paying the fee. It feels like a no win situation, which may explain why the FCA has been consulting about this single issue for the last 18 months... Read about the issue and about last month’s developments
The Retirement Outcomes Review (ROR) as a whole is focused on non-advised investors. However, the FCA published a policy statement at the end of July as part of ROR on a topic which may have an impact for advisers giving personal recommendations. The topic in question is “investment pathways”... Read more
Contingent charging is a sticky problem. If advisers don’t get paid for telling a client to keep their money where it is but do get paid if there is a transfer, how can we say for certain that their transfer recommendations are in the best interest of those clients? With contingent charging commonplace, this potential for conflicts of interest could put consumers at risk of bad outcomes. But slap a ban on it and you take away the transfer value as the client’s source of cash for paying the fee. It feels like a no win situation, which may explain why the FCA has been consulting about this single issue for the last 18 months.1
One way forward might be an outright ban where all advisers have to charge the same whether they advise to transfer or not. In theory this would surgically remove the conflict of interest, but in reality it’s not such a clean cut: consider the long lasting relationship with a client that can arise from a DB transfer – that could be valuable business, especially if it lasts long into retirement. The problem is, in order to truly match the remuneration package between positive and negative transfer advice under such a ban, firms would have to charge ongoing fees for doing nothing, or else do everything for free.
Consider also the pot itself – not just as a source of ongoing pension and death benefits for the client, but also as a source of cash from which to pay an adviser’s initial fees. For many people with low to medium savings, the transfer value arising from their DB scheme may be the biggest source of liquid cash they will ever see. In the absence of contingent charging, clients seeking advice would need to find thousands of pounds from other sources – not something everyone is able to do. The FCA are concerned that charging for advice not to transfer would effectively close off the advice route for lower earners. To compound the issue, since the mandatory advice requirement was introduced in 2015, the advice route really is the only route.
For Frank Field, Chair of the Work and Pensions Committee (WPC), the issue is clear-cut, and with the FCA’s final rules not due to be published until Q1 2020 he’s frustrated by what he sees as a lack of progress in protecting consumers from ‘the vultures circling around their pension pots’.2 It was back in March 2018 that Mr Field said it was now time for the FCA to ‘take the battle against the pension-snatchers further’ by imposing a ban on contingent charging for DB transfer advice.3
One of the reasons for this lack of progress is the sparsity of available evidence. The FCA says ‘a causal link between contingent charging and unsuitability is very difficult to prove statistically’.4 The WPC cites the opposite – they have seen no evidence that contingent charging is not linked to bad advice. The FCA has now come out in favour of a ban, which at least saves us from invoking Bertrand Russell’s teapot and debating whether absence of evidence is evidence of absence. But maybe the FCA have pinned their colours to the mast a little too soon: an FTAdviser investigation exposed the regulator as having no idea how many advisers are actually using contingent charging.5
The most recent publication is CP19/25, which starts by reaffirming the regulator’s position that a transfer is not normally going to be in the consumer’s best interest. It goes on to set out the proposals for a ban on contingent charging:
The consultation also introduces the notion of a half-way house that sits between triage and full advice. ‘Abridged Advice’ can potentially be cheaper to the consumer as it does not require the adviser to wade through the Appropriate Pension Transfer Analysis process – although it does need to be performed or checked by a Pension Transfer Specialist and meet the requirements for assessing suitability. It cannot be used to recommend a transfer, but it can be used to recommend that the client stays in their DB scheme.
The abridged advice solution has been met with scepticism by many advisers. Some feel that their reputations and livelihoods will be at risk if they make recommendations based on anything less than a full investigation. Some feel that the streamlined element is insignificant compared to the work that still needs to be done, and realistically will not afford the cost savings that the FCA are anticipating. Only 20% of advisers in a recent Prudential poll said they would be interested in offering abridged advice.6
One can’t help but wonder: might the establishment of a contingent charging ban on DB transfers pave the way for the industry to stamp out potential conflicts of interest in charging in other areas? Time will tell…
The current consultation also contains other proposals including the disclosure of charges, the ongoing CPD requirements, and the burden of reporting to the regulator. Comments are being accepted until 30 October 2019, so check out the paper and have your say. It’s a complex and detailed document, with the odd moment of enjoyable clarity:
‘we expect the market for pension transfer advice to contract as a result of our interventions.’
You heard it here first…
The Retirement Outcomes Review (ROR) as a whole is focused on non-advised investors. However, the FCA published a policy statement at the end of July as part of ROR on a topic which may have an impact for advisers giving personal recommendations. The topic in question is “investment pathways”.
The recent FCA publication is set against a background of the following common recurring themes identified by ROR as relating to non-advised investors:
- They aren’t engaging early enough with their retirement choices.
- They take the path of least resistance when selecting their retirement choice (not shopping around).
- They aren’t necessarily aware of where their money is invested, e.g. it could be wholly in a cash-like investment.
Investment pathways are aimed at addressing these problems.
Investment pathways – What are they?
Non-advised consumers who are not particularly engaged with or knowledgeable about investments may struggle to make good investment choices, so the FCA have focused on how to make conscious investment decisions easier.
The FCA recognise it can be difficult for investors to make the right investment choice in accordance with what they’re trying to achieve in retirement. In order to simplify this for the investor, they have decided to roll out investment pathways: four different options aimed at aligning investors with an investment solution rather than investing wholly or mainly in cash assets. The investment pathways are not meant to be a personal recommendation, but concerns have already been voiced by respondents over the potential for investors to think they are being presented with an option that matches their needs. The FCA countered this but fell short of promising providers protection from claims:
We are not able to provide a safe harbour for providers. In other words, we cannot make rules - or disapply requirements in legislation - to give providers a guarantee that in offering investment pathways they will not be providing a personal recommendation.
The FCA have implemented four investment pathways that should be presented to non-advised investors by the provider, broken down into four options for how consumers may want to use their drawdown pot:
- Option 1: I have no plans to touch my money in the next five years
- Option 2: I plan to use my money to set up a guaranteed income (annuity) within the next five years
- Option 3: I plan to start taking my money as long-term income within the next five years
- Option 4: I plan to take out all my money within the next five years
Each option will lead to the client following an investment solution created to match what they’re trying to achieve. There is a limit of one investment solution per investment pathway. Providers can add their own explanatory wording, but there must be a clear message to the investor to the effect that they aren’t being offered advice or guidance by the provider.
Providers will have to ensure that consumers entering drawdown who invest wholly or predominantly in cash, only do so if they have taken an active decision and give warnings to those who do decide to invest in cash, as well as those already in cash.
There will be easement for smaller providers - those with less than 500 members entering drawdown each year - who will have to present the investment pathways, but will not be required to offer solutions themselves.
Who do investment pathways apply to?
Requests that are in and out of scope are shown in the table below:
|In Scope||Out of Scope|
|The consumer moves all or part of their pension into a drawdown arrangement *||The consumer decides to take an UFPLS payment|
|The consumer transfers funds already in drawdown into a new drawdown arrangement *||The consumer has been advised on the transaction taking place|
* unless the consumer has received advice about the transaction
However, while it is non-advised consumers that are considered in scope - with the provider obliged to issue the four options - the pathways should be considered as part of the personal recommendation for a retail client, according to the FCA:
When a firm is making a personal recommendation to a retail client about the investment of funds in the client’s capped drawdown pension fund or flexi-access drawdown pension fund, its suitability assessment under COBS 9.2.1R(1)(a) should include consideration of pathway investments.
The new policy statement will be introduced into COBS next year on 1 August 2020.