Considering that all the pre-publication buzz around PS20/06 was about the ban on contingent charging – will they, won’t they? (they did!) – the paper actually covered a load of other bits and pieces.

You can read our previous articles here: 

Part one – contingent charging ban 

Part two – abridged advice 

Part three – workplace pensions

In this part four article, we look at a few of the other key areas firms should be aware of beyond those already covered in parts one to three. In our next Newsletter, part five will mop up all the remaining items.

Personal Charging Document
Before firms provide regulated advice on a transfer or conversion that requires a pension transfer specialist (PTS), they must send a letter of engagement to the customer that sets out, in monetary terms, the amounts the consumer would pay for abridged and full advice, and subsequent ongoing advice.

The personalised communication must be provided ‘in writing’, which includes non-paper methods of communication. The personalised charges communication must be personalised to the client, to distinguish it more clearly from the generic adviser charging structure.

Firms should disclose charges assuming that funds would stay invested, as this is likely to illustrate an upper bound for the ongoing charges. If an adviser offers more than one ongoing advice proposition with different charging levels, charges should be disclosed for all the propositions, as well as a description of the different servicing levels.

One page summary within suitability reports
Firms must include a one page summary, limited to one side of A4, at the front of all transfer suitability reports requiring a PTS. The one page summary must include:

• Charges disclosure: including ongoing advice and all product charges they expect to levy in the first year if a transfer or conversion goes ahead. Monetary values of first year’s charges and the client’s DB scheme income.
• The adviser’s recommendation: which clearly sets out whether the consumer should transfer or convert their pension or not.
• Pension risk: a statement on the risks of the pension transfer or pension conversion.
• Ongoing advice: information about any ongoing service provided, if the adviser proceeds with the pension transfer or pension conversion.

The FCA has created sample templates of the one page summary. These can be found in Annex 2 of the policy statement.

Client understanding
Firms must provide suitability reports for pension transfer or conversion advice in good time before a transaction is made. The phrase, ‘in good time’ is one that is used elsewhere in COBS rules and is, of course, open to interpretation. However, it seems clear that the intention of the rule is to ensure that clients are given enough clear and balanced information to make an informed decision on any recommendation – and enough time to consider it. We always recommend that firms build adequate ‘reflection time’ within the advice process.

That time can be built in easily. What is less straightforward is how to ensure that the client actually understands the implications of the recommendation and how that can be documented.

From 1 October 2020, firms must get evidence that the client can demonstrate they understand the risks to them of proceeding with a pension transfer or conversion before finalising the recommendation and keep a record of this evidence. GC20/01 states: 

“You also need to demonstrate that your client understands the risks of the advice you are giving them. If you propose to recommend a transfer but cannot provide evidence of (the client’s) understanding, then it is unlikely the recommendation is suitable. You should keep clear records of the steps you have taken to demonstrate a client’s understanding of the risks. 

If you recommend a transfer but cannot demonstrate that your client understands your advice and the risks of proceeding, you should stop. You need to be prepared to change your advice and recommend that your client does not transfer. You should be able to evidence how you have satisfied yourself that your client understands your advice.”

This is likely to be challenging. It is linked in some ways to the assessment of transfer risk that has been a requirement since October 2018 but that assessment is often missing in action or difficult to see in our experience.

Suitability
Considering the possibility that firms might be tempted to consider a recommendation to remain in the scheme as ‘safer’ than recommending a transfer, the FCA has reminded firms that, in both cases, firms could face claims for redress if they make recommendations they cannot demonstrate are in the client’s best interest. We have seen cases where the FCA found advice to remain with the scheme unsuitable.

Insistent clients
Related to the previous aspect, some firms have been identified as recommending the ‘safe’ do not transfer route but encouraging clients in a variety of ways to transfer as an insistent client.

The FCA recognises there could be an increase in insistent clients but will assess firms against whether they are following the Handbook guidance about insistent clients in COBS 9.5A.

Firms could also face claims for redress and FCA action if they behave in a way that could be interpreted as having contributed to the client’s decision to become insistent.

The FCA will be monitoring insistent client transactions through data collected from firms’ regulatory returns.

For firms considering transacting business on an insistent client basis, consideration should be given to any exclusions that exist within the firm’s PII policy.