Regulation  

FCA expected not to impose ban on contingent charging

FCA expected not to impose ban on contingent charging

The Financial Conduct Authority (FCA) won't impose a ban on contingent charging due to technical issues and a fear that it will restrict access to advice, Rory Percival has argued.

Speaking last week at a webinar on defined benefit (DB) transfers, organised by Prudential, the former technical specialist at the FCA, who now runs his own consultancy, believes it is very unlikely that the watchdog introduces an outright ban.

Contingent charging means a client only pays for the advice if they go ahead with a transfer, which the FCA said raises the risk of a conflict of interest.

In the case of pension transfers, the adviser won't get paid unless the pension is transferred, which is likely to mean the client giving up valuable benefits including a lifetime of secure income so it may not be in their best interests.

The regulator published a consultation in March where it lays out its views on this practice, with several financial advisers supporting a ban.

Mr Percival said: "I don't have any inside information, but I think that the answer [to the question if the FCA is imposing a ban] in no for two reasons."

Firstly, there are a number of technical issues about having a contingent charging ban, he argued.

He said: "In practice, there are two broad elements to giving advice on a pension transfer – one is if the recommendation is to transfer out or not, and if the answer is yes, to transfer, then which scheme does it go to, what investments to make, and the implementation side.

"It would be difficult for the FCA to mandate non-contingent charging for both of those elements. It would be more likely that they would mandate a non-contingent charging for the initial stay or go.

"The technical problem is that an adviser could say have a non-contingent charge of £500 for the stay or go analysis, but then we will charge some other much higher figure for the transfer advice on the implementation side.

"So, you haven't really mitigated the bias if you do that."

Mr Percival noted that the regulator itself recognised this challenge in its consultation paper.

The second reason for not introducing a ban is access to advice.

"The regulator is obviously very concerned about access to advice," which is mentioned several times in the Financial Advice Market Review (FAMR) consultation paper, he said.

He added: "There is a very fine line between bringing in regulations that are going to protect consumers, but also making sure that the market still operates and people can get access to advice.

"I think it [the regulator] won't ban contingent charging because there is a proportion of people, often at the lower end of the wealth scale, who simply can't afford a proper non-contingent fee."

Mr Percival revealed a lot of advice firms he is in contact with charge a fee of £2,000 to £3,000.

He said: "There are some clients that simply don't have that money, and therefore there is a restriction on access to advice, and I think that is the main reason why the regulator won't do an outright ban.