Defined BenefitJun 5 2020

FCA says charging ban could save consumers £1.4bn a year

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FCA says charging ban could save consumers £1.4bn a year
ByRachel Mortimer

The Financial Conduct Authority has dismissed industry concerns about the cost of its plans to ban contingent charging, with the City watchdog estimating consumers could save £1.4bn a year in a best case scenario. 

Earlier today (June 5) the regulator confirmed it would ban contingent charging on defined benefit transfers, in all but a few scenarios, with effect from October. 

The ban is intended by the FCA to remove the conflicts of interest which may arise when a financial adviser only gets paid if a transfer goes ahead, and allow good advisers to compete in the market.

In its policy paper the FCA said it was confident these interventions would be net beneficial to clients and in a best case scenario save consumers more than £1bn a year by reducing the harm from unsuitable advice, whilst saving them £371m each year in reduced advice costs. 

This scenario assumes there are no forfeited gains for those suited to a transfer who don’t transfer. 

In a scenario where there are gains of £52,500 forfeited by those who do not proceed to take advice but who would have been suited to transfer, the benefits of not receiving unsuitable advice amount to £209m and overall net benefits to £580m.

But the regulator said it believes often little harm will be caused by retaining the defined benefit pension income over time despite being potentially suited to transfer.

The regulator estimated the cost of transfer advice to be about £3,000-£3,500, per client, including an allowance for overheads and a profit margin.

This was based on "good quality, suitable advice" given in 20-25 hours half of which were carried out by a pension transfer specialist.

This was despite some firms warning the FCA it had underestimated its assumption of transfer advice cost, suggesting it did not take account of the skills, time and resources involved. 

Some firms even warned this estimation was an "implied price cap", but the regulator stuck by its calculations as "reasonable" and used the figures as a basis for its cost benefit analysis of the contingent charging ban. 

The FCA used transfer advice given in 2018 and 2019 to influence its cost analysis, which it said would take into account recent interventions and policy changes in the market.

In a worst-case scenario the watchdog estimated consumers would still be £359m better off as a result of its ban, and whilst the reduced advice costs represented a loss of revenue for firms it was still "net beneficial to consumers". 

The FCA said: "While it is difficult to predict with certainty how many firms will remain in the market, as well as the type and the quality of those that may leave, we still expect that good firms will be able to continue to offer advice profitably.