The Financial Conduct Authority (FCA) has announced that 193 firms have given up the permissions required to advise on defined benefit (DB) pension transfers since the announcement of the contingent charging ban.
Firms can either remove the permission entirely or add a limitation to exclude DB transfers.
The FCA said that 183 added the limitation, while 10 withdrew the whole permission.
The DB pension market has come under scrutiny due to the high risks associated with transferring out, which has caused professional indemnity (PI) insurance premiums to skyrocket.
As a result, many advisers have decided that keep serving in the space may not be worth the risk.
Drastic reduction
David White, managing director at QB Partners, told International Adviser: “I think that a large number of advisers exiting the market is probably the result that the FCA were expecting for, and perhaps hoping for, as their starting assumption for DB transfers is that the member should not transfer out.
“I can see what the FCA are trying to achieve by introducing non-contingent charging, as it reduces the chance of advice bias towards a transfer out of the DB scheme being advised. However, the downside is that it is becoming much more difficult for those members of the public who believe they have a genuine reason to transfer out to obtain advice.
“The number of advisers with permissions in this space is drastically reducing, and under non- contingent charging the member may have to commit to an advice fee without knowing what the outcome will be, which is very different from committing to a fee which is being deducted from the transfer value on completion.
“Members with a value of more than £30,000 ($38,591, €32,708) in a DB pension are required by law to seek advice, so the end result is likely to be that many less members transfer,” he added.
Watch closely
Justin Corliss, senior intermediary development and technical manager at Royal London, told IA that the FCA figures are not surprising.
“The number of advisers relinquishing their permissions to advise on transfers out of defined benefit schemes is an unfortunate response to the ban on contingent charging coming into force on 1 October 2020.
“While the carve-out to this ban, which allows a small segment of consumers to continue to be advised on a contingent basis, and the incoming ‘abridged advice’ model may limit the numbers leaving, the regulator must monitor the number of advisers exiting closely.
“It’s vital that access to quality, affordable advice is maintained, and that pension transfer advice does not become the domain of only those wealthy enough to afford it.”
Steven Cameron, pensions director at Aegon, told IA: “The latest set of regulatory interventions for DB advice include the requirement to recommend any transfer into a workplace DC pension unless the adviser can prove an individual arrangement is not just as good but better.
“We’ve already seen a steady decline in the number of advisers prepared to offer DB transfer advice and these further restrictions risk a further steep decline. This comes at a time when the economic impact of covid-19 may see some people facing financial difficulty, redundancy or being retired early and might be particularly keen to explore their options for retirement.
“We hope the FCA keeps a close eye on the ongoing supply of DB transfer advice to ensure this stays sufficient to have an effective market.”
A five-year-old issue
QB Partner’s White believes that the problems the sector is currently experiencing with DB transfers can be traced all the way back to the introduction of pension freedoms.
“The FCA do have a difficult task in regulating pension transfer advice. This became much more of a problem following the introduction of pension freedoms in 2015. In hindsight, pension freedoms appear to have been rushed through without any proper dialogue between the UK government and the FCA.
“Pension freedoms were announced in a fanfare of how much the government trusted people to make their own decisions and were protecting them from insurance companies and their annuity contracts.
“In reality, many people believe that pension freedoms were a political move by the Tories – being announced shortly before the May general election – raising massive amounts of tax on pension benefits being withdrawn, and stimulating the economy as people spent some of their pension earlier than they could have done under the old regime.
“However, the introduction of pension freedoms has left the public exposed to fraudsters and scammers.
“The FCA have been playing catch–up ever since pension freedoms were introduced, leading to an increasingly stringent approach being taken to the DB scheme advice issue, which has impacted upon many well-meaning regulated advisers and led to skyrocketing PI costs and increased Financial Services Compensation Scheme (FSCS) fees,” he added.
Contradictions?
While the regulator aims to make the sector fairer to consumers, its actions could result in actually making access to financial advice more difficult, White said.
“The FCA’s approach is understandable as they wish to protect the public from frauds and scams.
“However, the introduction of contingent charging is the latest in a series of rule changes which are making it more and more difficult for those people who believe they have good reason to wish to transfer out of their pension to obtain the regulated advice they need under the safeguarded benefit regime.
“To a certain extent, this defeats the object of the original pension freedoms initiative, in trusting members of the public to make their own decisions.”
