“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.”
According to Warren Shute, certified financial planner and director at Swindon-based Lexington Wealth Management, advisers who are only remunerated when a product transaction takes place “should not be allowed to be called anything other than sales consultant”.
He said: “You wouldn't ask a butcher for nutritional advice!”
Graham Bentley, managing director of consultancy gbi2, argued the RDR “identified advice as the chargeable activity, not an associated product recommendation”, so contingent charging is obsolete.
He said: “A recommendation to do nothing is no less chargeable than a recommendation to do something. Both require investigation and analysis to reach a conclusion. It’s the investigation and analysis that demands the fee.”
Some specialists are, however, advising caution about the regulator introducing a “blanket position”.
Rory Percival, former technical specialist at the FCA, who now runs his own consultancy, said he is adverse to an outright ban.
“If a client comes along and they got £31,000 they have to get advice. And if they have a low income and don't have any other resources at all, then they don't have the money to pay the non-contingent charge.
“I think I'm probably adverse to an outright ban, but certainly I think it should be the minority scenario. It should be the exception rather than the norm as it is at the moment.”
Mr Percival understands, however, why the MPs would suggest such a solution.
He said: “It’s is an easy, simple approach to take. It's a simple answer. The problem is good answers don't tend to be simple.”
There are also some financial advisers that don’t agree with the introduction of such a ban.
Alan Chan, director and chartered financial planner at London-based IFS Wealth & Pensions, argued that he hasn’t “seen enough evidence to suggest that contingent charging leads to poor advice”.
“If the advice is unsuitable, then it will be unsuitable regardless of how the advice is paid for. It’s all about the advice process, and management oversight and controls within a firm.
“This is what the FCA needs to work hard to ensure firms that are active in this market must have higher controls or compliance procedures in place.”
Mike Lacey, partner at Berkshire-based financial adviser firm Bowman Pension Consulting, argued that “an outright ban on contingent fees would lead to fewer people actually taking advice”.
