Several financial advisers have supported MPs call for the Financial Conduct Authority (FCA) to ban contingent charges, which are “incredibly risky” and “not compatible with best client outcomes”.
In its report into the British Steel Pension Scheme (BSPS), published today (15 February), the Work and Pensions Committee is recommending that the watchdog puts a stop to this practice, which they consider to be “a key driver of poor advice”.
The committee said: “Genuine independence is not compatible with a charging model that only rewards advisers for recommending a particular course of action.”
Contingent charging means advisers only charge a client a fee if they go ahead with the advice recommendations. The method has raised concerns about conflicts of interest, especially for pension transfers.
The FCA’s position on contingent charging has been set out since 2013 – it said that contingent charging is higher-risk than a time-cost charging model due to the need to sell products to generate revenue.
The FCA has previously said that firms operating under this model should ensure they have adequate controls in place to manage this risk and potential conflicts of interest.
According to an FCA spokesperson, the watchdog will take this and the committee’s other recommendations “as part on the ongoing work on reviewing rules around pension transfer advice”.
The watchdog is expected to publish its report on this issue until the end of Q1.
Kay Ingram, director of public policy at national advice firm LBEC, supports a ban on this practice.
She told FTAdviser: “It is not a practice which LEBC employ, as we believe it is important to maintain a neutral approach when advising on pension transfers. We charge a fixed fee for advice, regardless of the outcome of that advice.”
Andy Cowen, head of financial planning at Tilney, shares a similar view.
He said: “I agree that contingent charging is not compatible with best client outcomes and creates an inappropriate incentive for some advisers to recommend transfers.
“What clients need is objective advice and this can only be driven through setting apart, and separately charging for, the pensions technical advice as distinct from any subsequent investment recommendation. This is already Tilney’s approach.”
Smaller independent financial advisers are also calling for the watchdog to comply with the MPs request.
Martin Bamford, chartered financial planner for Surrey-based Informed Choice, argued that contingent charging is “incredibly risky from a consumer perspective, dramatically increasing the chances the adviser will recommend a product solution, regardless of suitability”.
He said: “If the only way for an adviser to get paid is to recommend an investment or switch, this financial motivation must reduce impartiality.
“I’m amazed that the FCA hasn’t cracked down hard on contingent charging since the Retail Distribution Review (RDR) was introduced at the end of 2012.
“The regulatory has previously made it clear to advisers they consider contingent charging to be ‘higher risk’, but they could have gone further, especially in relation to DB pension transfers.”