FG 21/3 – charging for DB transfer advice

Everyone involved with defined benefit pension transfer advice should by now be very aware that contingent charging is banned for all recommendations in relation to pension transfers or conversions except where the client qualifies for one of the two exemptions. The exemptions to the ban on contingent charging, which the FCA chose to call ‘carve-outs’ in order, no doubt in an attempt to introduce a bit of drama to the proceedings, apply when the client is in serious ill-health and/or serious financial difficulty.

Just for the record, it is probably helpful to reiterate the essential definition of the ban. The rules relating to the ban are all contained in COBS 19.1B and can be summarised as:

“When providing a recommendation relating to a pension transfer, the firm’s adviser charges, employer or trustee funded pension advice charge or remuneration must not vary regardless of whether: 

  • the firm makes a personal recommendation to a retail client to effect a pension transfer or retain the scheme benefits
  • the retail client effects the pension transfer”

Inevitably, since the ban came into being on 1 October 2020, ‘non-standard’ situations have come to light, questions have been raised and answers have been found. In addition, FG 21/3 has provided some further insights into the murkier corners of the contingent charging rules. We take a look at some of these below.

Can I have different fees for different clients?
The basic principle is that you need to charge the same fee for full advice regardless of whether you recommend a transfer or whether the client proceeds with a transfer. Further, if you have already provided the client with abridged advice, any fee charged for the abridged advice must be offset from the full advice fee (excluding any VAT that has been charged on the abridged advice fee).

However, you can have different full advice fees for different scenarios. For example, you might have a different fee scale where the client has more than one scheme, or where you are working with another adviser firm and only advising on the transfer, not the investment. So, a firm could have a number of different fee scales applicable to different ‘categories’ of client provided that the applicable fee is charged regardless of the outcome of the advice.

You can even provide full advice for free! This could be where the firm is acting entirely pro-bono on humanitarian grounds, or is helping a close family friend, provided that the firm can demonstrate the rules on contingent charging are not being breached. For example, where all of the related services provided (by the firm or any associate) are also free of charge. The firm will also need to show that the advice was free of charge irrespective of whether or not the advice results in a recommendation to transfer or not.

However …

You must not charge less than you would charge for investment advice on pension funds of the same amount. (Unless an employer or trustee funded advice charge is paying for part of it or it is a pro bono case.)

So, if the client is paying in full for the advice themselves, you must charge the same amount as if the pension funds did not come from a transfer. For example, if you charge £3,000 for investment advice on £X of DC pensions funds, you must charge at least £3,000 for pension transfer advice on a transfer value of the same amount. This applies whether or not you advise on the destination or arrange the transfer.

This rule applies to both initial and ongoing adviser charges.

This raised an interesting question from one of our clients recently. They had a husband and wife seeking transfer advice. Each had two deferred DB benefits, making four potential ceding schemes in all. The firm asked if it would be acceptable to reduce their fee in this situation as they felt that charging their full fee times four was not fair to the clients.

The basic answer to the question is YES – they could charge less provided that amount was charged regardless of whether a transfer was recommended or implemented.

However, it flagged up a problem, namely that the firm’s fee scale was not sufficiently detailed. Harking back to the previous section, what was missing was a defined scale for clients with multiple schemes and a defined scale for a ‘family group’. As stated earlier, each of these ‘categories’ could be charged differently for transfer advice if the firm so desired. But those reductions would also need to apply as standard to those categories of client for pure investment advice too.

The sky’s the limit

There is no limit to what you can charge for DB transfer advice. But you should not charge consumers who meet the carve-out test more than if they had not met the requirement for the carve-out.

Informing the client

You must provide a personalised charges communication before you start the advice process. Consumers need to be able to consider whether they want to incur the costs of advice before you commence the regulated advice process, i.e. if the client wishes to proceed beyond the triage stage. This is because the ban on contingent charging requires you to charge for advice that you have started but not completed. So, you cannot start work without getting the client’s agreement to the personalised charges first.

You may give a client a personalised charges communication based on contingent charging if you have reason to believe that the client is eligible for one of the carveouts. But you must also state why you think the ban does not apply and that the situation could change if further analysis indicates that the client does not meet the test for the carve-out.

And finally …

It is good practice to disclose upfront whether you will arrange a transfer for an insistent client if you advise against transferring.

If you do not act for insistent clients, you should consider including an explanation that they may incur further charges if they choose another firm to implement a transfer if you advise against a transfer.

The client can then make an informed decision about whether to proceed to take advice from you and understand the consequences of acting against your advice, if you do not recommend a transfer.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

The basic rules banning contingent charging on transfer advice are pretty straightforward. But there are many nuances contained in the rules and guidance. Contact us if would like to discuss how we can help you get it right.

Action Required By You

Review your transfer charging structure in light of the aspects mentioned in the article. Make amendments or contact ATEB as appropriate.
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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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