Defined BenefitJun 20 2018

Contingent charging is not all it's cracked up to be

  • Learn about the main challenges relating to contingent charging
  • Understand the impact of contingent charging on the advice process
  • learn about alternatives to contingent charging
  • Learn about the main challenges relating to contingent charging
  • Understand the impact of contingent charging on the advice process
  • learn about alternatives to contingent charging
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CPD
Approx.30min
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CPD
Approx.30min
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CPD
Approx.30min
Contingent charging is not all it's cracked up to be

The average size of a DB pension transfer is reported to be approximately £250,000. A transfer of this size with a 1 per cent ongoing advice fee applied for 20 years could generate £50,000 of income for a firm. If the transfer value is £750,000 that figure rises to £150,000. Of course, if the firm advises not to transfer, then it will not receive any income for funds under advice. Therefore, banning contingent charging would, at best, only mitigate one of the potential conflicts within the DB pension transfer market, with others remaining unaddressed. 

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.

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