FCA Handbook - COBS 19.1B Ban on contingent charging for pension transfers and conversions

[ Note : The FCA has also issued non-Handbook guidance for firms who advise on pension transfers. See https://www.fca.org.uk/publication/finalised-guidance/fg21-3.pdf ]

You are viewing COBS 19.1B Ban on contingent charging for pension transfers and conversions as of . COBS 19.1B Ban on contingent charging for pension transfers and conversions was last updated on 01/10/2020.

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COBS 19.1B Ban on contingent charging for pension transfers and conversions

Application

This section applies to a firm in relation to the provision of:

(1)
advice on conversion or transfer of pension benefits except where:
1. (a)
  the only safeguarded benefit involved is a guaranteed annuity rate; or
2. (b)
  it is abridged advice;
(2)
investment advice or other services in connection with a pension transfer or pension conversion (including, but not limited to, implementing and arranging a pension transfer or pension conversion);
(3)
ongoing advice or other services in relation to rights or interests in a non-DB pension scheme derived in whole or part from a pension transfer or pension conversion; or
(4)
any related services.

Purpose

The purpose of this section is to ensure that firms’ charging structures, either individually or taken together with other associates, do not create any potential for a conflict of interest relating to, or an incentive to recommend or effect, a pension transfer or a pension conversion to a retail client.

Ban on contingent charging

Except as specified in COBS 19.1B.9(1) or (2), a firm must ensure that both the methodology for calculating any part of, and the total value of, the firm’s adviser charges, employer or trustee funded pension advice charge or remuneration do not vary depending on whether or not:

(1)
the firm makes a personal recommendation to a retail client to effect a pension transfer or a pension conversion; and/or
(2)
the retail client effects a pension transfer or a pension conversion; and/or
(3)
(in relation to ongoing advice or other services in relation to the retail client’s rights or interests in a non-DB pension scheme) the rights or interests in the non-DB pension scheme include sums derived from a pension transfer or a pension conversion.

Where:

(1)
one firm carries out multiple services for a particular retail client; and/or
(2)
a firm and one or more firms that are its associates (including any other firm providing investment advice in relation to a proposed arrangement) are involved then,
COBS 19.1B.3R applies to the firm in relation to both the methodology for calculating any part of, and the total value of, the adviser charges, employer or trustee funded pension advice charge and/or remuneration of the firm and, where applicable, any of those associates.

(1)
A firm must not allow itself to be part of any charging structure or arrangement (operated by the firm or any associate) which could create a potential incentive to any firm or any firm that is its associate to recommend or arrange a pension transfer or a pension conversion to or for a retail client or otherwise could circumvent the rules in this section.
(2)
This includes charging structures in relation to the pricing of other goods or services provided to the client or a connected person at any time by any firm involved in the pension transfer or pension conversion arrangements, or by any associate of the firm.

Examples of unacceptable practices

The following evidential provisions provide examples of charging arrangements the FCA considers will breach the rules in this section.

(1)
A firm should not charge and/or receive adviser charges, employer or trustee funded pension advice charges and/or remuneration, that are higher, when taken together, if the recommendation is to effect a transfer or conversion than if the recommendation is not to do so.
(2)
A firm and/or any of its associates that are firms should not charge and/or receive remuneration of a higher amount for their ongoing advice or services in relation to the funds in a non-DB pension scheme than they charge or receive where the funds are not derived from a pension transfer or a pension conversion.
(3)
A firm should not purport to charge a retail client the same for advice that recommends a pension transfer or a pension conversion as it would for advice that does not recommend a transfer or conversion, but not take reasonable steps to enforce payment of the full amount of the charge by the retail client where the advice is not to transfer or convert.
(4)
A firm should not charge a lower amount for any other services provided, or to be provided, by the firm or an associate to the retail client or, anyone connected to the retail client, if the client is advised not to transfer or convert.
(5)
A firm should not subsequently vary its adviser charges, employer or trustee funded pension advice charge and/or remuneration for advice and/or related services so that in practice they become dependent on the outcome of a personal recommendation or whether the retail client effects a pension transfer or a pension conversion.
(6)
A firm should not charge less in relation to full pension transfer or conversion advice (including charges for abridged advice) than it would do if it provided investment advice on the investment of the same size of pension funds but which did not include funds from a pension transfer or a pension conversion. This does not apply in relation to full pension transfer or conversion advice where part of the charge is payable by an employer or trustee funded advice charge.
(7)
A firm should not undertake some services related to full pension transfer or conversion advice, such as parts of appropriate pension transfer analysis or transfer value comparator, then decline to advise further and not charge for the work undertaken.
(8)
Contravention of:
1. (a)
  either of (1) or (2) may be relied upon as tending to establish contravention of COBS 19.1B.3R; and
2. (b)
  any of (3) to (7) may be relied upon as tending to establish contravention of COBS 19.1B.5R.

Guidance about charging for full pension transfer or conversion advice

(1)
A firm may provide full pension transfer or conversion advice to a retail client free of charge in exceptional cases, even if they do not fall within the exceptions in COBS 19.1B.9R(1) or (2). This may be, for example, where the firm is acting entirely pro-bono on humanitarian grounds, or is helping a close family friend, where the firm can demonstrate that the rules on contingent charging in this chapter are not being breached. For example, where all of the related services provided (by the firm or any associate) are also free of charge. The firm will also need to show that the advice was free of charge irrespective of whether or not the advice results in a recommendation to transfer or convert.
(2)
Where a firm has provided a retail client with abridged advice and with full pension transfer or conversion advice, it should charge the retail client taking into account the guidance in COBS 19.1A.12G(2).

Exceptions to the ban on contingent charging

A firm need not comply with COBS 19.1B.3R or COBS 19.1B.5R in relation to full pension transfer or conversion advice if it has satisfied itself, on reasonable grounds and based on adequate supporting evidence, that the retail client is unable to pay for full pension transfer or conversion advice without using funds that are not reasonably available, and is either:

(1)
suffering from serious ill-health; or
(2)
1. (a)
  experiencing serious financial difficulty or likely would be if they had to pay for full pension transfer or conversion advice on a non-contingent basis; and
2. (b)
  would be able to access their pension fund immediately after a pension transfer or a pension conversion has taken effect.

A firm that charges a retail client in relation to full pension transfer or conversion advice on a contingent basis in reliance on COBS 19.1B.9R(1) or (2), must ensure that the methodology for calculating, and the total value of, the firm’s and any associate’s adviser charges, employer or trustee funded pension advice charge or remuneration for that advice, any related service, and any ongoing advice or other services in relation to the retail client’s rights or interests in a non-DB pension scheme, is not higher than if they had charged the retail client in relation to full pension transfer or conversion advice on a non-contingent basis.

A client is likely to meet the requirements for serious ill-health where:

(1)
the retail client has a particular medical condition, as shown by reliable medical reports or records; and
(2)
there are reputable sources of medical information to evidence that the medical condition in question results, in the majority of cases, in a life expectancy below age 75.

A client is likely to meet the requirement that they are unable to pay for full pension transfer or conversion advice without using funds that are not reasonably available where the amount of their reasonably available savings and investments is below the cost of full pension transfer or conversion advice.

The types of circumstances in which a client is likely to be able to show they are experiencing serious financial difficulty include where continuing to pay domestic bills and credit commitments is a heavy burden on the client and the client has missed payments for any credit commitments and/or any domestic bills in any three or more of the last six calendar months.

Examples of unacceptable reasons for relying on an exception to the ban on contingent charging

The following evidential provisions provide examples of what the FCA considers to be unacceptable reasons for relying on the serious financial difficulty and serious ill health exceptions and which, if relied on by a firm, the FCA considers will breach the rules in this section.

(1)
A firm should not be satisfied that a client meets the requirements for serious ill-health where a client is only able to demonstrate an expected reduced life expectancy due to lifestyle factors (for example smoking or drinking alcohol) and not a medical condition.
(2)
A firm should not be satisfied that a client meets the requirements for serious financial difficulty where a client is experiencing serious financial difficulties because of incurring non-essential expenditure.
(3)
A firm should not be satisfied that a client will be able to access their pension fund immediately after a pension transfer or pension conversion (relevant to serious financial difficulty) unless the client has been able to demonstrate to the satisfaction of the firm the basis on which they would be able to access their pension fund immediately after a pension transfer or pension conversion.
(4)
A firm should not be satisfied that a client is unable to pay for full pension transfer or conversion advice where a client is able to access reasonably available savings or investments to pay for full pension transfer or conversion advice but does not wish to access these to pay for advice.

Contravention of any of COBS 19.1B.15E (1) to (4) may be relied upon as tending to establish contravention of COBS 19.1B.9R and therefore COBS 19.1B.3R or COBS 19.1B.5R.

Additional record-keeping requirements for a firm relying on an exception in COBS 19.1B.9R(1) or (2)

In addition to any other record-keeping requirements to which the firm is subject, a firm charging a retail client on a contingent basis in reliance on one of the exceptions in COBS 19.1B.9R(1) or (2) must make and retain indefinitely a record of the evidence it relied upon to satisfy itself that all the relevant requirements in COBS 19.1B.9R were met in relation to the retail client.