FT Adviser published an article on 21 September under the heading ‘How to advise on DB transfers’. We would like to think that all published content is technically accurate, especially so when it is presented as CPD. However, this particular article was inaccurate on two counts. The purpose of this article is to confirm the correct information for any readers who saw the article and perhaps added it to their CPD log.

The corrections

The article stated that any fee charged must be related to the transfer value. This is not correct. There is no rule requirement for the adviser charge to be based on the transfer value (TV).

There would, of course, be an automatic relationship to the transfer value where any element of the charge is based on a percentage. Many, but crucially not all, firms do charge on this basis but there is no requirement in the rules so to do. On the contrary, the FCA envisaged, and indications are that the FCA would appear to prefer if firms were to charge a fixed fee based around typical time taken to complete the advice process. Policy statement PS 20/06 stated:

“Our new rules mean they will need to set a total charge for their activities, e.g. based on the average number of hours it takes to give advice.”

This statement referred to a particular charging scenario but the primary point is that the published final rules do NOT require a fee to be related to the transfer value. A fixed fee is perfectly acceptable provided it equates as per the following points on how much the firm charges for investment advice not related to a pension transfer.

The second inaccuracy in the article was this statement:

“Advisers must charge the same for investment advice on a DB transfer as they would for any other similar sized investment.”

Actually the rules refer to investments of the same size not ‘similar’. But the rules do NOT require firms to charge the same for transfer advice as for investment advice. There are actually two rules that apply, one to initial advice and the other to ongoing advice. These appear, at first sight, to be contradictory. However, they do make sense when considered in light of the antigaming provisions.

In respect of initial charges, the charge must not be less than would be charged for an investment of the same amount.

For ongoing charges the fee must be no higher than would be charged for an investment of the same amount.

Here are the relevant rules in full – items 2 and 6 refer.

“Examples of unacceptable practices

COBS 19.1B.6G01/10/2020

The following evidential provisions provide examples of charging arrangements the FCA considers will breach the rules in this section. 

COBS 19.1B.7E01/10/2020(1) A firm should not charge and/or receive adviser charges, employer or trustee funded pension advice charges and/or remuneration, that are higher, when taken together, if the recommendation is to effect a transfer or conversion than if the recommendation is not to do so.

(2) A firm and/or any of its associates that are firms should not charge and/or receive remuneration of a higher amount for their ongoing advice or services in relation to the funds in a non-DB pension scheme than they charge or receive where the funds are not derived from a pension transfer or a pension conversion.

(3) A firm should not purport to charge a retail client the same for advice that recommends a pension transfer or a pension conversion as it would for advice that does not recommend a transfer or conversion, but not take reasonable steps to enforce payment of the full amount of the charge by the retail client where the advice is not to transfer or convert.

(4) A firm should not charge a lower amount for any other services provided, or to be provided, by the firm or an associate to the retail client or, anyone connected to the retail client, if the client is advised not to transfer or convert.

(5) A firm should not subsequently vary its adviser charges, employer or trustee funded pension advice charge and/or remuneration for advice and/or related services so that in practice they become dependent on the outcome of a personal recommendation or whether the retail client effects a pension transfer or a pension conversion.

(6) A firm should not charge less in relation to full pension transfer or conversion advice (including charges for abridged advice) than it would do if it provided investment advice on the investment of the same size of pension funds but which did not include funds from a pension transfer or a pension conversion. This does not apply in relation to full pension transfer or conversion advice where part of the charge is payable by an employer or trustee funded advice charge.

(7) A firm should not undertake some services related to full pension transfer or conversion advice, such as parts of appropriate pension transfer analysis or transfer value comparator, then decline to advise further and not charge for the work undertaken.

(8) Contravention of:

(a) either of (1) or (2) may be relied upon as tending to establish contravention of COBS 19.1B.3R; and

(b) any of (3) to (7) may be relied upon as tending to establish contravention of COBS 19.1B.5R.”