The Personal Finance Society (PFS) is supporting the introduction of a ban on advisers charging for pension transfer advice on a contingent basis.
In its submission to the Financial Conduct Authority (FCA) consultation paper on the issue, which closed on Friday (25 May), the professional body for financial advisers argued the lower levels of suitability of advice given for pension transfer business, when compared to other investment business, is a clear indication conflicts of interest created by contingent charging “are not being managed successfully across the market”.
Contingent charging means a client only pays for the advice if they go ahead with the recommended course of action, which the FCA has 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 usually irreversible and 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 FCA's starting assumption is that a defined benefit pension transfer is not suitable for most people.
Despite this, thousands of people have transferred billions of pounds out of their DB schemes since the introduction of relaxed retirement rules in April 2015.
The FCA said: “We consider that [the contingent charging] model has the greatest potential to incentivise unsuitable advice as such a firm would not be viable if it did not recommend a minimum number of transfers each year.”
As an alternative to the controversial charging method, the PFS is suggesting the initial review and recommendation should have a separate charge, especially given the ongoing ‘starting assumption’ that a transfer is unlikely to be in the clients’ best interests.
The PFS statement said: “In respect of other forms of advice where the starting point is the need to do something (e.g. make a suitable investment), contingent charging is far less of a risk but in the case of defined benefit (DB) transfers where there is a strong possibility that a transfer is unsuitable, it is in our view inappropriate.”
Former FCA technical specialist Rory Percival is against an outright ban on contingent fees. However, he agrees with the PFS's general perspective view on this matter.
The only reason why Mr Percival is opposed to an outright ban is due to low income individuals.
He has previously stated: “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.”