The rules that came into effect in October 2020 arrived under a headline objective of ‘banning contingent charging’. Inevitably, the simple rule required to achieve this seemingly straightforward outcome had to be accompanied by a fairly large retinue of supplementary rules and guidance. Definitely a case of the devil being in the detail.
Much of the supplementary rules are in the category of what the FCA refers to as ‘anti-gaming provisions’. These are intended to prevent firms from ‘gaming’ the system. Wikipedia defines this as:
“… using the rules and procedures meant to protect a system to, instead, manipulate the system for a desired outcome … also rigging, abusing, cheating, milking, playing, working, or breaking the system, or gaming or bending the rules …”
Prior to the ban on contingent charging rules being published, it didn’t take much imagination to figure out ways to game the system. For example, charging a nominal fee for the advice and a large fee for the implementation. This was dealt with by requiring firms to charge the same fee whether a transfer was recommended or not and regardless of whether a transfer proceeded following a recommendation to do so. This effectively means that it is not permitted to charge an implementation fee.
Most of the anti-gaming rules can be found in COBS 19.1B.7.
More or less …
Another couple of rules that play a part in preventing firms from gaming the rules are what we call the ‘more or less’ rules.
Charging for initial advice
“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 means that advice on a CETV of £X must be charged at least as much as the firm would charge for advice on a straightforward investment of £X.
This rule has tripped a few firms up recently. We have seen several firms charging for transfer advice on the basis of a fixed fee plus a percentage of the CETV. At first sight, that appears to be perfectly reasonable. But this can breach the rule if the firm charge a straight percentage of the sum invested where no transfer is involved.
An example will help to clarify.
A firm charges transfer advice at £5,000 plus 1% of the CETV. For investments, it charges 3% on the first £250k, and 1.5% on anything above.
CETV £250k – fee is £5,000 plus 1% of £250k, a total; of £7,500
Investment £250k – fee is 3%, a total of £7,500
CETV £300k – fee is £8,000
Investment £300k – fee is £8,250
With these numbers the crossover point, where the rule is failed, is in fact a CETV of £250k. Firms with a similar fixed fee plus percentage charging model for transfer advice will undoubtedly have a ‘fail point’ somewhere. There is no solution to be found in playing with the amount of fixed fee or the percentage elements (unless the percentage is being increased beyond the percentage(s) charged for investment advice). Instead, the answer is to look at a percentage with a MINIMUM fee backstop rather than a fixed fee element.
Charging for ongoing services
“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.”
In an apparent mirror image of the ‘initial can’t be less’ rule, this rule is ‘ongoing can’t be more‘. It prohibits a firm from charging MORE for ongoing services than it would for reviewing a straight forward investment portfolio where those funds did not arise from a pension transfer.