This is the first in a series of five articles which will examine the implementation and implications of the recently published Policy Statement (PS20/06) on Pension Transfer advice and the related Guidance Consultation (GC20/01).

Contingent Charging Ban
This is probably the most publicised aspect of the policy statement, for obvious reasons.

From 1 October 2020, unless one of the exemptions described below applies, pension transfer advice must be charged on a non-contingent basis, i.e. the charge is levied whether or not the advice is to transfer. This will be a significant shift for some firms that currently operate on a contingent charging basis, where the advising firm only receives payment if the client is recommended to transfer out of their pension. This is probably the majority of firms operating in the transfer market.

In addition, advisers must charge the same monetary amount for advice to transfer as for advice not to transfer. And firms will not be permitted to charge more for ongoing advice on investments that were funded by a pension transfer than they would if the funds came from another source.

A number of rules will apply with the intention to prevent firms ‘gaming’ the system.

For example, while the FCA have confirmed that firms can charge percentage or fixed fees, firms will not be able to charge a non-contingent initial fee for the advice and then a subsequent implementation fee on a contingent basis.
 

Exemptions to the ban on contingent charging
There are two specific exemptions to the ban on contingent charging (which the FCA refers to as “carve-outs”). For consumers who fall into either of the following categories, firms will still be allowed to charge on a contingent basis:

• Serious ill-health
  … those who have a specific illness or condition that causes a materially shortened life expectancy (i.e. has a life expectancy of less than 75); and
• Serious financial difficulty
  … those who are facing serious financial difficulty, for example, regularly being unable to meet mortgage repayments, rent or utility bills. 

The FCA has stated that “where a firm wants to rely on a carve-out for a client, the firm must satisfy itself that the client meets the requirements for serious ill-health or serious financial hardship.”

While these consumers are excepted from the ban on contingent charging, the amount they pay for a transfer, and for ongoing services, should be no greater than it is for those consumers whose transfer advice is charged on a non‑contingent basis.

Let’s look at that a bit more closely.

Serious ill-health
Consumers will be able to self-evidence where they have a life-limiting medical condition (i.e. has a life expectancy of less than 75) and firms are expected to record the evidence the client provides. This evidence may take the form of existing documentation from a registered medical practitioner, including details of treatment, for example.

Consumers are not expected to incur extra cost or significant time in getting evidence. GP health records are increasingly available online and hospital records can be requested from the relevant trust. 

It should be noted that, in relation to the carve-out for serious ill health, the FCA …

“intend to restrict it to those who do not have the means to pay for advice, including those who would be likely to be forced into debt if they did not meet the tests for the carve-out and had to pay for advice on a non-contingent basis. Both the serious ill-health carve-out and the serious financial difficulty carve-out require that a consumer is unable to pay for full pension transfer advice.”

Serious Financial Difficulty
The FCA does not prescribe the circumstances in which this threshold will be met. Instead, non-exhaustive guidance sets out circumstances where the test is likely to be met and circumstances where it is likely that it will not be met. 

“The type of situation in which the carveout test will be met will be 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 consumer 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”.

Impact on consumers of banning contingent charging
The FCA estimates that 2 out of 3 consumers who will no longer take advice as a result of the ban on contingent charging would not have been suited to a transfer. While 1 in 3 consumers may have been suited to a transfer and benefitted financially, they will not be materially harmed by remaining in their DB scheme.

Timing of changes and transitional period
The ban on contingent charging comes into force from 1 October 2020 (although as mentioned above, it does not apply where the carve-outs are in place). However, there is a transitional period in place for firms with clients that have agreed contingent charges terms before 1 October 2020 and started work before 1 October 2020. Where a firm can demonstrate that this situation applies, it can charge contingently, provided a personal recommendation is given before 1 January 2021 (i.e. within 3 months of the ban being implemented).