Opinion  

The case for contingency charging

Daniel Elkington

Daniel Elkington

This could be as simple as that they have come in to discuss an unfunded public sector scheme and they have no other advice requirements.

A risk premium is incurred at the ‘recommendation’ stage. If half of those that take the adviser up on provision of a recommendation take options 1 or 2 below or their case may mean that it is simply inadvisable for the client to move their pension then, again, this extra work must be recouped elsewhere.

Article continues after advert

There are thousands of pounds of work that will likely go unpaid for if only the assessment fee is paid.

The client that proceeds to business must pay the business risk premia identified above or else the IFA business will go bust. This liquidation event is a poor outcome for all, and to be avoided.

Do advisers operate to this level of cross-subsidy? almost certainly not.

Former FCA staff member Rory Percival’s comments are pertinent here, he seems to feel for the IFA profession to behave in a more professional manner, all the fees should be explained and charged at the appropriate juncture. 

Returning to behavioural economics, not only must a client overcome status quo bias and the endowment effect, they also must overcome the negative way the regulator makes us frame and anchor our advice.

In conjunction with the effects of hyperbolic discounting and subsequent tendencies to procrastinate these psychological nudges mean all clients are in favour of doing nothing.

The psychological basis and the business risk premia identified above mean transferring a pension is very difficult indeed, and such difficulties comes at great cost to the public.

I hope that Keith Richards, chief executive of the Personal Finance Society (PFS), is right that we should not fear a price review from the regulator, although from recent comments from our illustrious regulator, perhaps we should?

The FCA is staffed, and properly so, by many those from a legal background. I would implore the FCA to try to see the balance of probabilities say the markets tend to be right and this post-RDR marketplace is one that is working well.

Our businesses are strong, our customer base has never been more loyal, and complaints about our service are the lowest they have ever been.

I welcomed the clearer consumer communications papers, but I had to redraft my client engagement documents the day after this was announced, as the old FSA tick-box form was a nonsense.

I urge the regulator to see contingency charging as being what it is; a valid business model. There will always be those that abuse it but removing it will have negative consequences.