Consultancy charging ‘dead in the water’ because of employee opt-out rule – Reid

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Consultancy charging is fundamentally flawed because employees can and will opt out of it, leaving employers with groups of advised and non-advised employees within their schemes, it is claimed.

Rule 6.1C.20(2) of the FSA’s Conduct of Business Sourcebook states that firms must not make a consultancy charge for the cost of preparing or giving advice to an employee who chooses not to accept the offer of advice. This means employees will vote en masse to opt out of paying the consultancy charge once they understand they do not have to pay for it says Robert Reid, director, Syndaxi Financial Planning.

The rule means employers, providers or advisers will also have to monitor and record opt-outs from consultancy charging as well as from auto-enrolment itself, says Reid.

Reid says journalists in national newspapers will advise employees to choose to opt out of paying consultancy charges, leaving a shrinking number of employees who have not done so left to shoulder the burden of the consultancy charges. Uncertainty over the number of employees paying the consultancy charge will make it impossible for advisers to set a charge they know is going to be met he adds.

Lansons Communications public affairs and regulatory consulting director Richard Hobbs says he agrees with Reid’s interpretation of the Conduct of Business Sourcebook rule.

Reid says: “The fact that employees can opt out mean costing is going to have to be dynamic which seems to blow a hole in the whole thing. Advisers can’t be definitive about how their costs are going to be recovered, and you will get a situation where those who don’t opt out are subsidising those who do.

Employees will get wise to this to the point that most will opt out. I can see people in big organisations like supermarkets setting up Facebook pages telling colleagues to opt out.”

Hobbs says: “Subsection 2 does seem to suggest that the employee can opt out of the advice and having to pay for the consultancy charge. Journalists would probably therefore advocate that employees opt out of the consultancy charge.”

Conduct of Business Sourcebook

Rule 6.1C.20

Requirement not to make a consultancy charge in certain circumstances

……………………………………………………………………………………………………

When an employer asks a firm to provide advice to the employer’s employees, the firm:

  1. (1) may make a consultancy charge for the cost of preparing and giving advice to each employee who chooses to accept his employer’s offer of advice;

  2. (2) must not make a consultancy charge for the cost of preparing or giving advice to an employee who chooses not to accept the offer of advice;

  3. (3) (if the firm prepares generic advice to be given to more than one employee) must not make more than one consultancy charge for preparing that advice.