8 things you need to know about PS20/6
Around this time last year, I was in the process of digesting the contents of FCA consultation paper CP19/25. This was the third in a series of consultation papers aimed at improving the quality of pension transfer advice, and the most prescriptive and decisive to date. The regulator even acknowledged that, “the proposals in this CP are likely to reduce the number of advisory firms active in the market, as well as access to advice, at least in the short-term”. I remember thinking at the time that this CP could be a game changer!
The long awaited response to CP19/25 arrived in June, in the form of policy statement PS20/6. As industry experts predicted, it contained no big surprises, with only minor amendments to the original proposals. A bit more unexpected was the issue of FCA guidance consultation GC20/1 on the same day. This paper was issued in response to industry calls for increased guidance in this area and contains examples of good and bad practice and invites feedback from the industry. Together with PS20/6, GC20/1 is a ‘must read’ for those involved in providing pension transfer advice.
So what are the changes and when will they happen?
The proposals are quite detailed and lengthy, so the points below are merely a high level summary, and I would expect Pension Transfer Specialists to be familiar with the finer detail. Similarly those who are studying towards AF7, PETR or an equivalent qualification should take the time to absorb the details, as pension transfer advice has evolved markedly in a short period of time and students are likely to encounter exam questions that test their knowledge of the latest guidance.
- Ban on contingent charging
This is one you will definitely be aware of as there has been much discussion and polarisation over this proposal. Bar limited circumstances, advisers must charge (and collect) the same fee for pension transfer/conversion advice, regardless of whether the recommendation is to transfer or not. This single charge for advice must cover all related and associated charges including investment advice, and the FCA have laid out a number of rules to prevent “gaming” of the ban. The ban will be introduced on 1st October 2020 for new clients, with a short transitional period for clients who agreed to contingent charging before this date.
- Carve out
Although the ban on contingent charging is designed to protect consumers, there are concerns that it could restrict access to advice for some ‘vulnerable’ groups where transfer may be considered suitable, but who are unable to pay for advice on a non-contingent basis. To mitigate the impact on access to advice, those clients who are considered to be in ‘serious ill health’ or in ‘serious financial difficulty’ are carved out and can continue to pay for advice on a contingent basis. The FCA have set out evidential provisions and guidance in the Handbook, with examples of where they think the test will or will not be satisfied. GC20/1 also contains examples of where carve out may apply.
- Triage Services
PS20/6 sets out that “triage should be an educational process so that consumers can decide whether to proceed to regulated advice”. If advisers give a professional opinion, based on considering the client’s circumstances that steers the client towards keeping or giving up their safeguarded pension benefits, they are likely to be giving advice. To minimise the risk of advisers crossing this ‘advice boundary’, firms should not use decision trees and traffic-light RAG-rated questionnaires within a non advised triage service with immediate effect.
- Abridged advice
The FCA have introduced a new shortened form of pension transfer advice. Abridged Advice is a means of filtering out unsuitable transfers and only has 2 possible outcomes; ‘recommendation not to transfer’ or ‘it’s unclear from the information available in the abridged advice process, whether the client would benefit from a transfer’. Abridged Advice does not include APTA, thus it enables consumers to access low cost pension transfer advice, where transfer may be unsuitable. Should the outcome be unclear, the client can choose to proceed to full advice. Remember though, that a transfer can only be recommended after receiving full advice. Abridged Advice will be introduced on 1st October 2020, but there is no obligation for advisers to provide this service.
- Prioritising DC Workplace Pensions schemes
Previously, advisers were merely required “to demonstrate that any alternative pension plan the client is transferred to is at least as suitable as the workplace pension”. From 1st October 2020, advisers will be required to demonstrate that any alternative is ‘more suitable’ than an available workplace pension. This substantially higher test is intended to protect consumers from being transferred into products that are unnecessarily complex or have high charges (including ongoing adviser charges) and there are limited circumstances where a WPS does not need to be considered. All firms will need to change their processes to undertake the required analysis in the APTA and recommend a WPS where it is as suitable. Again this measure will be introduced on 1st October 2020, with limited transition for clients in the pipeline.
- Empowering consumers
FCA file reviews have highlighted poor levels of disclosure, particularly in relation to the way initial and ongoing fees are communicated. Before engaging in advice, firms must now send clients a letter of engagement that sets out in monetary terms the amounts that would be paid under various conditions.
Additionally, all transfer suitability reports requiring a PTS will now require a “one page summary” at the front. This is limited to an A4 if printed size and must contain a charges disclosure, summary of recommendation, pension risk and details of any ongoing advice. The client is invited to sign each section in acknowledgement. Whilst the layout is not prescribed, the FCA have set out examples of an approved format in Annex 2 of the policy statement.
Finally, firms must check the clients understanding of the advice. Firms will be required to gather evidence demonstrating their client’s understanding of the risks of proceeding with a pension transfer or conversion before finalising the recommendation, and keep a record of this evidence. Each of these three requirements will be effective from 1st October 2020.
- Technical Amendments
Several technical amendments are outlined in PS20/6, but I will only cover two key areas, the TVC and cashflow modelling:
A few minor amendments to the TVC calculation include the pre-retirement expense assumption being reduced from 0.75% to 0.4% to reflect the lower costs of investing solely in gilts. The rate of return in accumulation is also based on the 5- to 10-year UK FTSE Actuaries Index or the 10- to 15-year index, and we can disregard the 5- to 15-year index. Additionally, there is an assumption that a male member has a spouse/partner 3 years younger and a female member a spouse/partner 3 years older similar to how CETVs are calculated. Another point of note is that where early retirement benefits are available without reduction and no consent is required to take them, the TVC should be based on the earliest age at which such benefits can be taken, rather than at NRA.
These are changes that could crop up in a pension transfer exam, so it would be worthwhile to have a think how these factors might affect the outcome of the TVC.
Whilst cashflow modelling is not a mandatory part of APTA, it would be very difficult to demonstrate the suitability of transfer without it. However, the FCA’s supervisory work identified some areas where they feel cashflow modelling was used in a way that could be misleading. The latest guidance therefore intends to introduce consistency in cashflow methodology. As of 1st October 2020, where cash flow modelling is used, this must be in real terms (inflation linked), use reasonable assumptions for tax bands and limits as well as allow for taxes that are likely to arise on a transfer e.g LTA. Models must also include some form of stress testing.
Again, this is a good subject for an exam question so students take note.
- Enabling Advisers
The FCA want to see higher standards of advice and believe this can be achieved if PTSs improve their levels of knowledge and understanding through formal training. This builds on the previous requirement set out in PS18/20, that PTS must hold a level 4 investment qualification by October 2020 (now extended to October 2021 due to Covid-19).
PTSs must now complete 15 hours of pension transfer specific CPD on an annual basis, 9 hours of which must be structured and 5 hours must be with an external body.
Remember that this is additional CPD on top of learning required for other areas of advice.This was initially proposed from the start of 2021, but PS20/6 brought this back to 1st October 2020 to align with the other changes. PTSs will however have the ability to start their CPD year within the following 12 months to align with another form of CPD.
Feedback from CP19/25 highlighted concerns about the availability, cost and quality of trainers to provide 5 hours of external CPD, particularly if larger advice firms took up much of the available capacity. Expert Pensions recognise that advisers, especially in small firms, may not be able to access external training at a reasonable cost. In response to feedback and in line with increased PTS CPD requirements, we have created a new online service for PTSs, whereby they can access a full 15 hours of structured pension Transfer Specific CPD.
Please keep an eye on our website for further details of our ‘PTS knowledge Hub’ and further insight into the implementation of PS20/6. 1st October is just round the corner!
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