Would a ban on contingent charging lead to better outcomes?
If the argument is that firms are providing unsuitable advice to help them earn more income from fees, what would the impact of banning contingent charging be? In this scenario, the firm would have to charge a fee for the initial advice then face the conflict of receiving more advice income if it does recommend the transfer. If the assumption is that a firm cannot mitigate the initial conflict, what is the likelihood that it will be able to successfully mitigate the second?
While the popular call for banning contingent charging is well intentioned, there is no evidence that it will lead to better customer outcomes. We do not necessarily support a contingent charging model, but it is our view that banning the model will not lead to materially better outcomes for customers.
This is why we believe the focus needs to be on a firm’s culture. The main driver for almost half of the advice to transfer being unsuitable cannot purely be down to contingent charging. If the FCA had material evidence to prove there was a causal link, it would probably have acted already.
I have reviewed pension transfer files for more than a decade, first at the regulator and now as a consultant. In that time, I have seen some good advice provided by firms who operate contingent charging models. Of course, I have also seen some poor customer outcomes from firms using the same pricing models. However, I have not seen a material difference between advice firms using a contingent model and those that do not.
It is important to remember that contingent charging is not the only charging structure that gives rise to conflicts of interest. Where firms apply an hourly rate for advice, there is a conflict as the longer they take to research and give advice, the more fee income they will receive. The FCA allows firms to mitigate this conflict themselves. It is impossible for the FCA to put in place rules to mitigate all conflicts, just as it is not possible for a firm to establish controls to mitigate all conflicts. The only way to mitigate conflicts effectively is by ensuring the firm’s culture is appropriately aligned to consistently deliver the right customer outcomes.
When discussing this issue, we need to be mindful of the current advice landscape, including the perceived advice gap. Many potential customers who could benefit from advice do not feel they are able to pay for it. By banning contingent charging, we could potentially see an increase in the number of people not seeking financial advice on this important decision, thereby increasing the risk that customers either make unsuitable or sub-optimal decisions.