Contingent charging to be banned by November under FCA proposal

The number of consumers being advised to transfer from a defined benefit to a defined contribution pension scheme is “too high”, the FCA said, and is being driven by charging structures loaded in favour of advisers.

“We are concerned that, despite our previous work, too many advisers are delivering poor advice, much of it driven by conflicts of interest in the way they are remunerated. In particular, the practice of contingent charging where advisers only get paid if a transfer proceeds creates an obvious conflict,” the consultation paper read.

The FCA proposes to ban contingent charging, except for a small group of consumers, subject to a consultation period that runs until October 30 this year. If approved, the policy is planned for implementation “within a week” with a three-month transition period.

The motivation behind the proposal was to “protect consumers from poor outcomes” when they transfer from a safeguarded, inflation-hedged DB pension to a flexible DC pension, which is subject to market volatility and longevity risk.

We are concerned that, despite our previous work, too many advisers are delivering poor advice, much of it driven by conflicts of interest in the way they are remunerated

Financial Conduct Authority

However, the FCA admitted the policy was likely to accelerate the shrinking of the advice market, after a hike in the Financial Ombudsman’s compensation limit – rising to £350,000 from £150,000 on April 1 this year – made it more difficult for some independent financial advice companies to find suitable insurance.

“Our interventions on charging may result in some advisers withdrawing from the market and some consumers being unable to afford or access advice on whether to transfer,” it said.

New drawdown rules

In Tuesday’s announcement, the FCA also confirmed new policies to tackle complexity in drawdown for consumers who do not opt for financial advice.

Within 12 months, drawdown providers will be required to: offer non-advised members at least four investment pathways; provide warnings to consumers who invest wholly or predominantly in cash, which must now be an active decision; and publish annual information on costs and charges they have paid on their pension pot.

“Our new rules and guidance aim to improve consumer decision-making and promote competition by making the charges associated with drawdown products clearer and comparisons easier,” it said.

During the feedback stage, providers requested 18 months to implement the proposals, but the FCA responded that 12 months was sufficient.

Pushing for competition in non-workplace pensions

The FCA also invited responses on promoting competitiveness in non-workplace pensions on Tuesday, with a consultation period on greater transparency running until October 8 this year.

The FCA identified low levels of consumer engagement, complex charges, weak price competition and lack of switching, among other issues, as problems within the £470bn non-workplace pensions market.

“We think that greater transparency can improve competitive pressure in the market from consumers,” the document read.