FSA mulled factoring on GPPs over up-front cost concerns

The FSA has ruled out allowing provider factoring on group personal pensions (GPP) advice despite admitting concerns over up-front costs.

It says if it did allow factoring, it would run the risk of "regulatory arbitrage" via firms using GPP contracts in place of individual ones, where factoring has been banned under adviser charging.

In its final RDR rules on corporate pensions, published today, the FSA says a number of stakeholders called for it to allow factoring of consultancy charges - the name given to adviser charging in the GPP arena - in a bid to spread out up-front costs and provide income to advisers in the short term.

The FSA itself provides an example of the potential size of up-front costs on a GPP contract, where the initial commission amounted to 30% of the first year's contributions.

While admitting 30% may be on the high side, it says if taken as a proxy for an adviser's initial costs, an employee contributing £200 could be charged £720 in the first year, totaling £36,000 for an employer's 50-member scheme.

"We are told that up-front costs can be high...and considered the call for factoring of consultancy charges," the paper reads.

"[But], if we did not have a ban on factoring under GPPs, it would be possible to circumvent the rules banning factoring of adviser charging under individual personal pensions by creating and selling GPPs in their place."

In today's paper, the FSA confirmed the ban on commission for sales in the GPP market from 1 January 2013.

The rules apply to all sales regardless of whether they are made through advice to individual employees, or through employer schemes.

It introduces the concept of ‘consultancy charging', where the costs of pensions advice and other services to employers must be agreed with the employer, but can be obtained from employees' GPP accounts, in a similar fashion to individuals' advice costs under adviser charging.