Opinion 

Financial advice and the contingent charging predicament

Tiffany Tsang

Tiffany Tsang

Following the introduction of pension freedoms, there has been an ongoing shift of responsibility onto savers, adding complexity to already difficult financial decisions for people at the point of retirement.

As such there will be few savers who can make these choices without some form of financial advice or guidance.

Savers considering transferring from defined benefit (DB) into defined contribution (DC) schemes also face these challenges.

This makes it even more crucial that the support they are given is comprehensive and in their best interests. 

While the vast majority of advisers are doing the right thing by their clients, the Financial Conduct Authority (FCA) published findings on pension transfer advice found there are reports of poor practice in this area of advice work.

This has raised concerns and therefore it is right the regulator works to strengthen consumer protection through its new consultation paper, 'Improving the quality of pension transfer advice'. 

One of the main concerns raised in the FCA’s consultation is around the use of contingent charging.

This is not the first time its merits have been called into question, with the Work and Pensions Committee previously stating it is “a key driver of poor advice” and recommending a ban back in February.

The committee said: “Genuine independence is not compatible with a charging model that only rewards advisers for recommending a particular course of action.”

The Pensions and Lifetime Savings Association (PLSA) supports a ban in principle, as we believe incentives for poor practice for DB to DC transfers must be eliminated.

We all know that DB to DC transfers should only be carried out when it is clearly in a client’s best interest to do so. It’s therefore vital that we work with the regulators to protect vulnerable consumers.

There is currently no publicly available information from the FCA or The Pensions Regulator on the scale or scope of DB to DC transfers.

In short, we do not know where the consumer demand for transfers is coming from.

For instance, are they mainly from small transfer values (that is, £30,000 to £100,000), from medium transfer values (that is, £100,000 to £250,000) or large transfer values (that is, £250,000 plus)? 

The lack of data on the transfer value sizes, as well as information on what is being done with the money once it has been transferred, makes it very difficult to fully understand the potential negative impacts for savers who are transferring.

Some in the industry believe a ban on contingent charging could make it harder for people with small to medium transfer values to access advice.

It is possible that low-cost advice options could be found in new technological advancements, which have led to a rise in automated advice and other digital tools.

As DB to DC transfers will likely continue to remain popular, we urge the new Single Financial Guidance Body to develop further guidance on this issue for those with small to medium transfer values.

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