What a carve out!

The FCA has been on a personal journey. Over the last few years, it has ramped up its focus on the advice given on defined benefit (DB) transfers, intensifying monitoring and introducing a host of new analysis and procedures for advisers to follow and adopt.

The FCA has particularly struggled with contingent charging (where the client is only charged a fee for transfer advice if the transfer goes ahead). And after much deliberation, it has eventually decided to ban it with effect from October 2020. In the end, the FCA felt contingent charging created too much of a conflict of interest and was likely to result in bad advice.

However, the FCA accepts the ban will affect those do not have available funds to pay for transfer advice, but whose personal circumstances mean a transfer may be the best decision. In other words, the ban is reducing access to advice for some who really need it.

To try to square that circle, it has introduced a set of carve-outs from the contingent charging ban. These consumers have certain identifiable circumstances – they are in ill health or dire financial circumstances – and so could potentially benefit from a DB transfer, although do not have the means to pay for the advice. In these limited circumstances, the FCA will allow firms to offer advice on a contingent basis.

However, the FCA is keen to emphasise that just because someone falls into one of these categories, doesn’t means their DB transfer is automatically suitable. Instead, it expects to see some cases where the adviser’s recommendation is to stay within the DB scheme.

It’s important to note the starting point is that the client doesn’t have funds to pay a non-contingent fee and is in either serious ill health or serious financial difficulty.

Serious ill health

The consumer must have a condition which gives them a likely life expectancy of below age 75. After initially proposing that a medical professional had to evidence a reduced life expectancy, the FCA is now going to allow people who have life-limiting medical conditions to self-evidence their medical situation.

This is a more practical solution. Asking medical professionals may have cost significant amounts of money and/or held up the DB transfer process. Some medical professionals may have been reluctant to commit on paper their estimations of people’s life expectancy.

Instead, the FCA believes consumers should be able to access their own medical files with little time delay or additional cost. Financial advisers can also add to the evidence using information generally available from reputable organisations and charities.

However, it does beg the question of how robust this evidence will be. If a medical professional is unwilling to sign their name against a guesstimate of life expectancy, it seems peculiar to ask a non-medically qualified financial adviser or planner to ensure the right evidence is on file.

Serious financial difficulty

People may qualify for this exemption if paying the pension transfer advice fee pushes them into financial difficulty. The FCA has not set rules prescribing a threshold or definition of serious financial difficulty. This gives advisers and their clients more flexibility.

However, the draft guidance suggests advisers should be able to evidence clients have been unable to maintain payments on a mortgage/rent, debt repayment, council tax or utility bills for at least three of the past six months. It’s likely that the client has documented debts, and that they have cut out all non-essential spending.

The FCA goes on to suggest that, in most cases, the client should be no younger than 54 and a half years old, as they would need to access the funds on transfer. However, they could be younger if they had a protected retirement age (and it was a buddy transfer) or if they were able to access the transferred funds early under the ill health or serious ill health rules.

Expected numbers

The FCA expects low numbers of carve-out consumers (firms will have to report numbers to the FCA in a new data requirement) – its cost benefit analysis estimates only 11% of consumers taking DB transfer advice will fall into a carve-out exemption. It also expects firms to have a robust policy on carve-outs which includes considering offering these clients abridged advice first. But if the client is right down on their financial luck, many won’t be able to pay for abridged advice either (despite the relatively lower price tag).

Finally, advisers’ policies must reflect that many carve-out consumers may be relatively more vulnerable than other consumers. These are hard-up people looking for financial salvation. The FCA warns they need to be treated with care, and other debt management options may suit them better.

The bottom line is a carve-out exemption is only suitable for a few, and is not a way to get around the contingent charge ban.

This article was previously published by Money Marketing

Senior Technical Consultant

Rachel is a Senior Technical Consultant helping financial advisers and planners understand the changing pensions and savings environment, as well as how new legislation and regulation affects them and their clients. She’s well known within the pensions and savings industry, and regularly speaks at AJ Bell events, alongside writing content and articles for our website.

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