The trade body for financial advisers has warned against banning the use of contingent charging, saying the move would push consumers to seek the cheapest, not best, advice available.
In its response to the Financial Conduct Authority’s (FCA) consultation on defined benefit (DB) transfer advice, which closes today (25 May), the Personal Investment Management & Financial Advice Association (Pimfa) said preventing advisers from charging based on business written would not improve the quality of advice or achieve better consumer outcomes.
Instead, the trade body warned, it would push consumers towards becoming non-advised or seeking out the cheapest advice they could.
Simon Harrington, senior policy adviser at Pimfa, said: "We are not convinced that the removal of contingent charging will necessarily improve the quality of advice consumers will receive or indeed, improve their overall outcomes.
"Ultimately we do not believe that banning contingent charging is in any way complementary to the government’s stated aim of closing the advice gap.
"For many individuals, contingent charging is the only effective mechanism through which they can access quality advice due to the upfront costs involved. It is reductive to assume that contingent charging is both responsible for adviser conflicts of interest and indeed the only determinant of unsuitable advice."
The FCA issued the supplementary consultation in March, alongside its new rules on DB transfer advice, saying it was concerned about potential conflicts of interest if advisers only got paid if the advice was to transfer.
DB transfers are high on the FCA’s agenda because they mean a client is giving up valuable benefits, including a lifetime of secure income, which may not be in their best interest and advice is mandatory for transfers worth more than £30,000.
The industry has clashed over whether contingent charging should be banned, with Aviva backing a ban and Standard Life warning of potential risks in the way consumers may seek to work around the ban; for instance, they may choose to opt for a transfer in order to be able to pay for the advice with their pension money.
Pimfa said that if the regulator decided to go ahead with a ban it should consult with the industry on what alternatives could be put in place to help consumers address the high cost of advice.
The trade body thought the majority of recommendations and remedies set out in the consultation paper were "proportionate and logical" and would ensure consumers were provided with the highest quality advice available to them at retirement.
These included the proposal to force pension advisers to hold the Level 4 post-Retail Distribution Review qualifications for advising on investments - as well as a specific pension transfer qualification - before they can advise on or check pension transfer advice.
It also introduced rules around value analysis, including swapping the currently used transfer value analysis (TVAS) for an appropriate pension transfer analysis (Apta) of the client’s options, and introducing a transfer value comparator (TVC) which would compare the value of the benefits being given up with the cost of purchasing the same income in a defined contribution environment.
It also stated it will require all advice on pension transfers to be a personal recommendation.
carmen.reichman@ft.com
