In part one of this series, we covered the big headline item from Policy Statement 20/06, namely the coming ban on Contingent Charging in relation to pension transfer advice. In part two, we look more closely at 'abridged advice', a totally new concept.
From 1 October 2020, firms advising on pension transfers will have the option of providing abridged advice.
Abridged advice can be thought of as a kind of 'super-filter', facilitating, for some clients, a recommendation as to whether a transfer might be appropriate or not, at a lower cost, or even no cost, than would apply to a full advice process.
Abridged advice enables an adviser to:
- Provide the consumer with a personal recommendation not to transfer or convert their pension;
- Tell the consumer that it is unclear whether they would benefit from a pension transfer or conversion based on the information collected through the abridged advice process. The adviser must then check if the consumer wants to continue to full advice, and if they understand the associated costs.
Firms are not obliged to provide abridged advice, although if a firm chooses to do so, this needs to be provided or checked by a qualified Pension Transfer Specialist (PTS).
It should be noted that where a client proceeds to full advice, the FCA still expects some consumers to be advised not to transfer.
Boundaries of abridged advice
Firms offering abridged advice are only permitted to go through the initial stages of the advice process including:
- Fact Find/Know your customer assessment;
- Assessment of risk;
- Consideration of benefits available within the scheme.
Firms should consider the benefits of the client’s existing scheme but must not undertake an Appropriate Pension Transfer Analysis (APTA), provide a Transfer Value Comparator (TVC) or consider any potential receiving scheme.
When giving abridged advice, firms must consider the risks of staying in the scheme and the risks of transferring and losing the benefits. However, as abridged advice does not consider how funds might be invested if a transfer proceeded, the risks associated with a specific flexible arrangement should not be considered.
As with full advice, firms should start by assuming that pension transfer or conversion will not be suitable.
Timeline for abridged advice
The effective date for the rules on abridged advice is the same as for the ban on contingent charging - 1 October 2020. Firms must not provide abridged advice prior to 1 October 2020.
Potential benefits of abridged advice
For the advising firm, abridged advice offers a way of filtering out clients who are unlikely to be recommended a pension transfer without needing to go through the time and expense of providing a full advice service.
For the client, where a transfer is clearly not in their best interests, this will have been identified at a lower cost than would apply to full advice.
Abridged advice is clearly a product of the issues raised around triage over the past couple of years. The December 2018 FCA Pension Transfer Questionnaire identified that some firms had been filtering out clients who were unlikely to benefit from a transfer, without proceeding to a formal, written transfer recommendation. Abridged advice allows firms the opportunity to provide reduced cost advice to DB pension scheme members who will not benefit from a transfer.
- Advice process
Firms should carefully consider whether to offer an abridged advice service to clients and, if so, how they will implement it.
For example, should a firm offer abridged advice to a client, who is ultimately recommended to transfer, then this would in essence, require two separate transfer recommendations. The first would outline that it is unclear if the client would benefit from a transfer and that they have the option of proceeding to the next stage. The second would be a positive transfer recommendation once further information is considered including the APTA and TVC. This will clearly have implications for firms’ existing advice process and cost of delivery.
Abridged advice is effectively a sub-set of the initial stages of full advice. Firms are not permitted to charge twice for the same piece of work. So, while firms can choose to provide abridged advice free or charge a fee, if the client then proceeds to full advice, advisers will need to offset any abridged advice charge from the full advice charge (unless the client uses different advisers for abridged advice and full advice).
The total cost for full advice should not be different between clients that have received abridged advice and those that went straight to full advice.
- Client communication
Abridged advice could potentially meet resistance from some clients, particularly as offering this service would require the client to pay (if the firm chooses) for advice that can only result in a recommendation not to transfer or to proceed to another stage, for which a further fee is payable.
Firms will need to consider how they communicate this with clients and keep them informed throughout the advice process.
- Advice timescale
It seems obvious that abridged advice will have an impact on the time it takes to go through the full advice process for some clients, particularly those who are ultimately recommended a transfer. As such, firms should consider what level of reflection time is reasonable for each stage of the advice process and what implications this would have on CETVs with imminent guarantee end dates.
However, it is worth stating that our view is that CETV guarantee dates should not be seen as a deadline. The transfer advice process is complex and time consuming and should not be rushed. An extension or new CETV should be obtained where possible if that aids the likelihood that the client has sufficient time to reflect and make an appropriately informed decision.
Firms must not get involved in any arrangements to assist a transfer or conversion for a client and must not provide confirmation of advice to the trustees of an occupational pension scheme, unless the client has taken full advice, in line with existing rules.
Firms should be aware that the following Handbook rules on suitability apply:
- Full Pension Transfer Advice
COBS 9 and COBS 19.1
- Abridged advice
COBS 9 and COBS 19.1A (new)
- Investment Advice
COBS 9 and COBS 19.2
When it is clear a pension transfer would not be in the client’s best interest, abridged advice offers a potentially viable, low-cost alternative to going through the full advice process.
However, it is not obvious why a firm would provide an abridged advice service on a fee basis or why any client would want to pay a fee to be told, "stay where you are" or "you still have to pay more to get advice that will enable you to access your transfer value".
Some firms might consider there is merit in providing an abridged advice service free of charge. This could be the answer to the dilemma that, without abridged advice, there is no half-way house currently between triage/no advice and FULL advice. So, firms could usefully provide a free abridged advice service so as to be able to compliantly weed out clients that clearly should be told ‘don’t transfer’, e.g. very low attitude to risk and/or capacity for loss; the scheme will be their only guaranteed income source; the client is way too young etc.
However, abridged advice is not without its challenges and we expect that not all firms will wish to offer this service and client demand might be low.
For those firms offering abridged advice, consideration will need to be given as to how this can be delivered, particularly as firms are still liable for the suitability of advice provided.
Action Required By You
- Consider if an abridged advice service will be provided and the impact this will have on the existing advice process;
- ATEB have particular expertise in assisting firms to create and implement robust transfer advice processes. Speak with your ATEB compliance consultant or contact ATEB directly if you would like to discuss any aspect of PS20/06 further.