The FCA has effectively put an end to advisers using contingent charging by making it economically unviable as a means of payment, specialists have claimed.
Last week the FCA published new pension transfer rules in a 58 page-long policy statement, titled Improving the quality of pension transfer advice.
While the regulator stated it had ditched plans to introduce a ban on contingent charging, pensions experts claim the new rules for pension transfer means this form of remuneration has now been made no longer commercially viable for advice firms.
Contingent charging means advisers only charge a client a fee if they go ahead with the advice recommendations. The method has raised concerns about conflicts of interest, especially for pension transfers.
Rory Percival, former technical specialist at the Financial Conduct Authority (FCA), said three of the watchdog's new rules for pension transfers mean advice firms can no longer afford to be paid by clients on a contingent charging basis.
The first rule identified by Mr Percival is the FCA's new guidance on triage, which will come to force on 1 January 2019.
The FCA stated triage should be a non-advised service, and an educational process, so that consumers can decide whether to proceed to regulated advice.
"This means that more clients will end up going through the full advice process and the end result will be a recommendation to stay," he said.
The second issue will be caused by the transfer value comparator (TVC), which replaces the critical yield calculation in suitability report.
If you work on a contingent charging basis, your costs will go out the window, and a natural implication of that is that you will have to charge more and revisit your charging structure, or of course move into a non-contingent charging basis.Rory PercivalThe TVC - which came into force last week - showed, in graphical form, the transfer value offered by the DB scheme and the estimated value needed to replace the client's DB income in a defined contribution (DC) environment, assuming the investment returns were consistent with the client's attitude to risk.
Mr Percival argued that according to the mandated wording of the new rules, advisers are obliged to say to the client in the TVC "it is going to cost you X thousand of pounds more to transfer".
He said: "Clients are going to respond differently to that, and there is going to be a lot more clients who will decide not to transfer.
“I have an adviser already telling me that is what his clients are saying to him.”
Finally, the greater number of clients that will be advised to stick with their defined benefit pension pot will now cost more to firms as advisers will need to produce a suitability report even if they recommend the client takes no action, Mr Percival noted.
This report, which will give customers a "record of the reasons why remaining in a safeguarded benefits scheme is the most suitable outcome for them," is expected to create an additional expected cost of £6.6m to £10m per year, every year, according to the FCA.
Added to this there is also the cost of updating processes for the suitability reports, a one-off expense, which the FCA estimated at £1,000 per firm.
Mr Percival said: “Advice firms will get more clients incurring the costs of the full advice process, but a smaller proportion who end up transferring.
“So therefore, if you work on a contingent charging basis, your costs will go out the window, and a natural implication of that is that you will have to charge more and revisit your charging structure, or of course move into a non-contingent charging basis."
When the FCA was asked to comment on suggestions it hadn't needed to ban contingent charging because it had made this method of payment no longer financially viable, a spokesman for the City watchdog was unable to comment.
Brian Hill, managing director and fiduciary financial planner at Jones Hill, argued that a financial adviser who doesn't already state how much it will cost the client to transfer, or provide full reports for recommendations to stay, "needs to take a long, hard look at their positioning and process".
He said: "Having operated non-contingent charging across the board for the last five years for 95 per cent of clients, it is vital advisers get their positioning right so that clients can see the value they are adding for the fee charged.
"In a post-Retail Distribution Review world we have seen good financial advice moving out of the reach of less well-off; a part of me wonders if in trying to, quite rightly, protect clients from a small number of unscrupulous advisers, a significant number of potential clients will now never benefit from the good that expert financial advisers do."
maria.espadinha@ft.com
