The 1 October 2020 marks the day when contingent charging for defined benefit (DB) pension transfers is banned.
The move was announced by the Financial Conduct Authority (FCA) in May 2020.
The contingent charging model sets out that a customer should only pay for the advice provided if the pension transfer goes ahead.
On the same day, the regulator is introducing an ‘abridged advice’ model where advisers will be able to identify those clients for whom a DB transfer would not be suitable, which would come at a lower cost.
As soon as the ban was announced, an significant number of advisers working in the DB space decided to exit the market altogether.
International Adviser reported earlier this month that data from the FCA revealed that 193 advice firms gave up their DB transfer advice permissions in the three months following the announcement of the ban.
Steven Cameron, pensions director at Aegon, is concerned that the ban, and the plummeting number of planners left in the DB transfer space, will create a gap in the advice supply.
“With the latest set of regulatory interventions for DB transfer advice coming into force on 1 October, all eyes will be on the impact on not just the quality but quantity of advice on offer.
“The new rules were announced back in May and aim to further reduce the incidence of unsuitable advice in this key area. While well intentioned, the concern is that additional requirements may lead to more advisers stopping advising on such transfers.
“We’ve already seen a steady decline in the number of advisers prepared to offer DB transfer advice as a result of the perfect storm of heightened regulatory and political scrutiny and challenges in obtaining affordable professional indemnity (PI) insurance cover.
“This week’s figures from the FCA’s Retirement Income Market Data show the number of DB transfers fell by 28% to 40,600. This fall came just ahead of the pandemic, whose economic impact is seeing many people facing financial difficulty, redundancy or being retired early, some of whom might be particularly keen to explore their wider retirement options.”
Spotlight on suitability
The problem arising from the ban is that people will be forced to pay for advice whether that results in a transfer or not. There are, however, exceptions to this rule for those in troublesome financial or health situations.
In the event that a transfer is recommended, especially from a workplace to an individual scheme, pressure is on the adviser to prove it is more suitable.
Cameron continued: “The new measures apply where the advice process starts on or after 1 October, with a three-month transitional period for where advice has already started. They include the banning of contingent charges, with some limited ‘carve outs’ for those in serious financial difficulty or with a specific life shortening condition.
“Those not eligible for carve out will have to be prepared to pay upfront for advice, whether or not this results in a recommendation to transfer, which could put some people off.
“The FCA has also strengthened the emphasis on recommending any transfer into a workplace DC pension. An individual pension can only be recommended if the adviser can show it is not just as suitable, but more suitable than a workplace pension.
“But advisers may have concerns that recommending alternatives will be challenged later by the FCA.”
The abridged advice model comes into force on the same day.
Cameron explains it is designed to “allow advisers to more quickly identify customers for whom transferring is unlikely to be suitable, at lower cost”.
He hopes this latest advice structure will not only identify those unsuitable for a transfer, but also those who would benefit greatly from one.
“We hope the FCA keeps a close eye on the ongoing supply of DB transfer advice to ensure this stays sufficient to provide an effective market,” Cameron added.
“It’s vital that individuals have the opportunity to explore transferring which while for many will be unsuitable, for others could offer a life-changing opportunity.”