Ban on member-borne commission: 6 April 2016

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

New prohibitions on member-borne commission come into force on 6 April 2016. Although this may not have a big impact on current charging practices, there is a notification requirement which will apply to trustees of all schemes where at least some of the benefits provided are money purchase and the scheme is used for the purposes of automatic enrolment (AE). The DWP has issued guidance on the scope of the new requirements.

The ban applies to new commission arrangements entered into from 6 April 2016 (and the variation or renewal of existing arrangements). The regulations do not actually refer to commission but to "advice and service", which is not defined. It will be prohibited to impose a charge on a member that is used to pay an adviser (directly or indirectly), or to reimburse a service provider for payments it has made to an adviser.

The requirements apply to:

• occupational pension schemes providing money purchase benefits which are used as qualifying schemes for AE ("specified schemes");
• all members will be covered (not just those subject to AE) (but see below for multi-employer schemes);
• protection will continue even if the scheme ceases to be used for AE;
• AVCs will be covered, even where they are the only money purchase benefits in the scheme;
• in multi-employer schemes it will only apply to current and former employees of any employer using the scheme for AE;
• it will also cover decumulation products offered by these schemes.

Executive schemes, SSASs and schemes with one member are excluded from the new prohibition.

Broadly, in specified schemes, it will be prohibited to impose or permit to be imposed on a member, a charge that is used to pay an adviser (directly or indirectly) or to reimburse the service provider for a payment made to an adviser. A service provider is defined as ‘a person who provides an administration service directly to the trustees of a specified scheme’. In practice, service providers are likely to be someone providing a bundled administration service, such as an insurer or master trust provider. It will also include someone who provides unbundled administration services, such as third-party administrators and employee benefit consultants.

Trustees are required to notify the service provider that the scheme is a specified scheme within three months of the latest of:

• 6 April 2016 (i.e. by 5 July 2016);
• the date on which the scheme becomes a specified scheme; or
• the date on which the service provider is appointed.

On receiving notice, the service provider then has two months to confirm to the trustees whether the scheme is compliant (i.e. there are no prohibited charges). The trustees must then confirm this confirmation (or otherwise) on the scheme return.

Members can opt out of the new prohibition in writing and agree with an advisor to bear a commission charge for a particular advice or service. The member or adviser must copy this to the trustees and service provider. If the trustees think that this opt-out would take the member over the restrictions on charges generally, then they can require him to enter into a separate services agreement. The agreement will not take effect if the trustees believe (and notify the member, adviser and service provider) that there are not sufficient assets relating to the member to pay the charge.

The Regulator has power to take enforcement action against trustees and service providers in relation to breaches of the new requirements.