Distribution dynamite

The final proposals from the FSA\'s review of retail distribution said a lot more about group pensions than many had expected. And it would not be hyperbole to describe these proposals as astounding.

Corporate advisers take note. Last year’s feedback statement FS08/6 contained only two short paragraphs about group personal pensions but revealed the dilemma that the FSA was juggling with. Should it regulate the advice given to individual members of GPPs? And, if it didn’t, was there a risk that advisers would start selling individual PPs and SIPPs as pseudo group schemes to avoid adviser charging?

The FSA has decided not to take the risk that advisers would set up group schemes to get around adviser charging. It proposes instead bringing individual employee advice to join a GPP within the adviser charging rules (see CP09/18 4.60). Therefore, in this situation, advisers will have to disclose their fee scale and agree a price for each one-to-one consultation.

In such a bulk advice situation, advice might be limited to scheme joining and investment choice only. The adviser may decide to charge a flat fee, say £250 per member.

But the problems will start if product charges are used to cover the cost of adviser charges. The RDR prohibits factoring of advice costs, but ‘flexible charging methods’ (see CP09/18 4.21) are still allowed to cover the cost of advice on regular contribution products such as GPPs.

Deducting £250 from someone contributing £3,000 a year to a GPP will be a different prospect from deducting £250 from someone paying in £1,500 a year. The net result is that where employees receive one-to-one advice, and the cost of that advice is paid from the product, the charges would be unique to each employee, regardless of whether the advice charge is set up as an AMC, nil-allocation period or percentage of contribution. Operating a GPP with unique charges for each member is a tall order.

The only possible solution might be a fixed monthly charge – say £10 a month for 25 months, regardless of contribution. The adviser would not get their money up-front, but in line with the amounts deducted by the product provider – in this example £10 a month.

Whether such a charging method is fair to a part-timer, paying in £50 a month with three years to go to retirement is another question. Providers may need to build in decency limits on adviser charge deductions that may prevent extraction of the full cost of advice.

Many have predicted that RDR will finally end commission-based GPPs and employer-sponsored stakeholders. But whilst adviser charging faces some pretty high hurdles if it is to be made to work, basic advice seems to get around the problem with ease.

The FSA does not propose applying adviser charging to basic advice (see CP09/18 3.13). They say they have not identified ‘the same market failures’ as adviser charging seeks to address. I am surprised that they found the market for basic advice at all, since the stakeholder suite of products (and basic advice) never took off.

This would allow advisers to offer basic advice to prospective members of stakeholder pensions only and receive commission for doing so. At a charge cap of 1.5 per cent for ten years and 1 per cent thereafter, commission is feasible if persistency is good and claw-back applies over a long term.

Not only might commission still be available via basic advice, basic advisers are not subject to any exam requirements.

A corporate adviser may therefore decide to set up an arm of their business giving basic advice to employees, with the other arm remaining independent. The independent arm would restrict its advice giving activities to the employer.

Where advice is given to the employer, the FSA is undecided on whether that advice should be covered by ‘arranger charging’ (see CP09/18 4.64). In this case, the employer negotiates the advice cost, on behalf of the member, and it is disclosed to the member alongside the KFD. Comments on advice costs and GPPs must reach the FSA no later than 31st July 2009.

Somewhat worryingly, the FSA also hints that a new RU64 rule might be around the corner (see CP09/18 4.63), relative in this case to personal account charges rather than stakeholder. Wider investment choice will, it suggests, be no reason for recommending a higher charging GPP over personal accounts.

Instead of a damp squib, the corporate adviser has been handed a lighted stick of dynamite. Get rid of it before it explodes.