Providers welcome FSA's non-prescriptive charging guidance

Providers have welcomed the FSA’s Consultancy Charging Working Group’s review, but emphasise the need for the resulting guidance to be non-prescriptive.

In June 2010, the FSA announced as part of the RDR it would ban the payment of commission on new corporate pension schemes from 31 December, 2012.

Instead of commission, the FSA said advisers would need to be remunerated by other means, including fees and/or consultancy charges.

However, the FSA said it recognised the corporate pensions market was distinct from other areas covered by the RDR and asked the Society of Pension Consultants (SPC) to provide a chairman to lead a group to look into the allocation of consultancy charges among members of workplace pension schemes.

SPC chairman Sir James Hodge (pictured) brought together a panel of 40 representatives from across the industry including providers, advisers and trade bodies.

The panel, as the Consultancy Charging Working Group, came up with guidance aimed at employers outlining both good and poor practice when setting consultancy charges.

Hodge says the group's aim was purely to set out guidance on good practice not a prescriptive document, as the FSA had already laid out its final rules on moving to consultancy charging and the group was in no way seeking to change them.

He explains: "We did not try to set up something employers would be required to comply with.

"There is no monitoring system but I hope given those in the working group cover a wide area they have come up with a range of suggestions which we hope will commend themselves generally to the industry but it is not a question of saying you must do this or that."

Hodge says the SPC has put the guidance on its website and circulated it among its members.

However, given the guidance is aimed primarily at employers, should trustees and pension schemes be taking anything from it?

"I would hope trustees keep an interest as they are supposed to in whatever schemes are coming up against," he says.

"I would hope all those involved in pensions take a look at it and endorse it as a guide to good practice, but it is not a form of regulation and people are not required to sign up to it."

Scottish Life business development manager Jamie Clark says the report was a step in the right direction, but adds there are more steps to take before the industry is in a position to properly set out exactly what the requirements will be and how they will work.

Clark says: "In our experience in speaking to advisers around consultancy charging and in particular how it fits with automatic enrolment it has become clear their main concern is how it will all work in practice.

"The report lays out the framework but there is much work to be done in the form of implementation. In particular, advisers need help in understanding the new charging regime and how it can be applied within their business."

Clark observes the first step for advisers is to establish exactly what services they are prepared to provide and how much it will cost them to provide those services.

"One difficulty is advisers may not be used to using such an approach," he says.

"This is a key issue and one which providers must address. Indeed some providers, including Scottish Life, are already providing assistance in this respect with a view to setting a menu of services and charges to facilitate the transition across to the post RDR world."

Standard Life head of corporate strategy and propositions Jamie Jenkins says the key thing is that the guidance is not overly prescriptive in nature.

This, he says, affords employers flexibility based upon the needs of their workforce. Otherwise, he says, you remove the ability to innovate around it.

"In doing so what you end up with is initially as set of principles and we are very pleased they have come to what looks like an agreement around best practice," Jenkins says.

"It is a useful way for companies to decide within what they see as a reasonable framework."

Jenkins says a broadly represented working group means there is consensus around the paper.

"Ultimately it is trying to fit with the aim of the FSA's original intent: remove the commission bias and focus on other areas of innovation," he says.

One element of the group's guidance Jenkins says was particularly welcome was its highlighting of instances where a flat fee is charged from each members policy, which proportionately could be very high for someone playing a low premium.

"It is good we have picked up on things like that," he says.

"It is not saying you cannot do that but you need to watch it is not unfair to members in that position. It highlights some of the potential pitfalls."

Good and bad practice when setting consultancy charges

Good Practice

• The consultancy charging arrangement should take account of the needs of the employer
• It should also take account of the needs, demographics and characteristics of the employer's workforce so that it's fair, as far as possible, to all members
• The arrangement should detail clearly the services being provided, to whom, the cost of these services, who is paying for them and how they are being paid for
• There should be a clear distinction between services provided under the consultancy charging arrangement from those provided under any adviser charging arrangement
• Where the consultancy charge includes a prearranged individual advice service, the cost of the service should be clearly shown. The member should be told where they can opt out of an individual advice service
• Cross-subsidy between members may be appropriate. For example, a consultancy charge proportionate to contributions or member funds may be preferable to a flat charge which penalises lower earners. This should, however, be weighed against the need for simplicity and consistency of approach across the membership as a whole
• If consultancy or adviser charges will have a significant adverse impact on members' funds, consideration should be given to whether member advice may be delivered more cost effectively. For example, by providing guidance via employee seminars
• The charge structure should be simple and transparent so that employers and members understand how much the advice and services cost, and the benefits they receive from it
• The charge structure should be stable, as far as possible, so that it does not have to be changed often. Costs incurred by the scheme as a result of legislative changes may be an example where an increase in charges cannot be avoided
• The charge structure should be adaptable to a member's changing needs. For example, on a member leaving the employer's service
• Clear communications and disclosure of the charges to members
• An education program explaining to employees the benefits of the scheme and saving for retirement
• For a member leaving the employer's service, any consultancy charges in respect of ongoing (as opposed to initial set up) services should be replaced if necessary by an adviser charging arrangement where individuals wish to continue to receive ongoing services

Poor Practice

• Charging an employer or member for a service not provided. For example, if a member opts out of an individual advice service or leaves employment
• Overcharging an employer or member for an agreed service
• Services and costs not clearly defined under the consultancy charging agreement
• Complex charging structures that employers and members don't understand
• Charges which disproportionately impact on different categories of members. For example, high initial charges may disproportionately impact on members paying low contributions
• Applying unexpected additional charges (which could reasonably have been anticipated in advance) to an existing member. For example, the costs and timings of periodic reviews should be able to be anticipated whereas costs arising from future legislative changes will be unknown
• Continuing to apply the same level of ongoing consultancy charging to deferred members (unless the same level of services is maintained)
• Failure to review an agreement in light of changes in circumstances.