Pension transfer advice – personalised charges

“I’ve started so I’ll finish …”.  A well known catchphrase first coined by Magnus Magnusson, the original presenter of the BBC’s long running Mastermind show and continued by his successor, John Humphreys.

The FCA seemed to pick up on the concept in the pension transfer rules that came into force in April 2018. If the transfer advice process is started, it has to be finished. COBS 19.1.1C requires that a personal recommendation must be made to transfer or not transfer. Further, having started the process, the non-contingent charging rules introduced in October 2020 mean that the fee must be charged in either event, assuming that neither of the ‘carve-outs’ apply, i.e. the exemptions to the ban on contingent charging.

The carve-outs are intended to enable clients who are in serious ill health or serious financial difficulty to be advised on a contingent fee basis where they pay only if a transfer is recommended and implemented so that the adviser fee can be facilitated by the pension plan to which funds are transferred.

Now, it is possible that a client could be in a position where he or she does not have sufficient resources to pay the fee but does not satisfy the financial difficulty conditions and for that not to be discovered until the adviser had gone some way through the fact finding process. At first sight, the guidance in COBS 19.1B.12 would appear to cater for this situation.

“A client is likely to meet the requirement that they are unable to pay for full pension transfer or conversion advice without using funds that are not reasonably available where the amount of their reasonably available savings and investments is below the cost of full pension transfer or conversion advice”

However, as mentioned above, there are conditions that must be satisfied in order to qualify for the serious financial difficulty exemption. So it is not as easy as the guidance suggests where simply not having sufficient funds to pay for advce qualifies the client for the exemption. There needs to be evidence of indebtedness as well. The carveout test is based on the Money and Pensions Service (MaPS) definition of over-indebtedness, which has 2 parts:

  • keeping up with domestic bills and credit commitments is a heavy burden, and
  • payments for any credit commitments and/or any domestic bills have been missed in any 3 or more of the last 6 months

If a client would immediately meet this test if they had to pay for advice on a non-contingent basis, then they can be treated as meeting the test. In some cases, this may include financial difficulties caused by the circumstances of household dependants, such as having to pay for care.

Which takes us right back to the question of how to deal with the client who cannot afford to pay for advice but who does not satisfy the contingent charging carve-out conditions. Once the advice process has started it has to finish and be paid for. Advisers can’t simply call a halt to proceedings when the fact find identifies the client will not be in a position to pay if a ‘do not transfer’ recommendation is made. Nor can advisers proceed and ensure they recommend a transfer so as to ensure payment.

Puzzle solved

The solution to this apparently tricky situation is to be found in the personalised  charges communication. This must be issued to clients in addition to the firm’s standard fee disclosure documents when full advice is to be provided. It must be issued in writing, in good time before making the personal recommendation. For that reason, the one-page summary that has to be included in the suitability report does not replace the need for a personalised charges communication. In any case, although the one-page summary does include charges information, the personalised charges must include some information that is not in the summary, including “… the expected amounts payable (in cash terms) … and a statement that the amount of charges payable … is the same whether or not the advice is to transfer or convert …”. Full details of what must be included can be found in COBS 6.1A.18A.

In FG21/3, the FCA made clear that clients need to be able to consider whether they want to incur the costs of advice before firms actively undertake any of the steps associated with the advice process. Accordingly, firms should not start work without getting the client’s agreement to the personalised charges first. As part of this agreement to the charges, there is nothing to prevent a firm from requesting confirmation from the client that they can meet the cost in the event that a transfer does not proceed.

Abridged advice

The personalised charges communication is only required prior to full advice. In the case of abridged advice, the firm must disclose to the client in writing the amounts payable (in cash terms) in each of the following situations:

  • the firm gives abridged advice and a personal recommendation not to transfer or convert their pension;
  • the firm starts the abridged advice process but is unable to take a view on whether it is in the client’s best interests to transfer or convert without undertaking full pension transfer or conversion advice; and
  • the firm gives abridged advice followed by full pension transfer or conversion advice .

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 rules and guidance that came in last October covered a lot of ground. Firms involved in pension transfer business are well advised to revisit the relevant policy statement and finalised guidance now that the dust has settled and check that all the new requirements are incorporated in the advice process.

Action Required By You

Review your transfer advice process against each of the requirements introduced last year, especially the documentation and charging requirements.
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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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