Defined Benefit  

Contingent charging ban to increase tax bills

Contingent charging ban to increase tax bills

A ban of contingent charging will lead to increased tax charges for clients, the Personal Finance Society (PFS) has warned. 

Keith Richards, chief executive of the professional body, told FTAdviser there was a VAT exemption which applied to business with an intent to transact, whether the client goes ahead with it or not.

This exemption applies to advice with contingent charging, he said, but it doesn’t apply to direct fees for advice.

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Contingent charging means a client only pays for the advice if they go ahead with the recommended course of action. In the case of pension transfers, the adviser won't get paid unless the pension is transferred.

An outright advice charge, on the other hand, would mean the adviser gets paid for the advice regardless of the outcome.

Under the 1994 VAT act, the exemption applies when an adviser contacts the product provider on their client’s behalf and "acts between the provider and the customer with a view to arranging the sales of the retail investment product".

Mr Richards said: "There are different models across the market, we have many member firms that operate today on an hourly rate and flat fees, but it is fair to say that the majority will still be employing contingent charging or a blend of fees for their clients.

"That is why we have been quite firm in our view that we have to be careful that we aren’t removing consumer choice."

This was one of the arguments made by the professional body in its submission to the Work and Pensions select committee inquiry into charging structures for financial advice on defined benefit (DB) transfers, launched in January.

In a deviation from its previous stance on contingent charging, the PFS also warned of other unintended consequences from introducing a ban.

The body had previously called for a ban of the charging practice. It had told the Financial Conduct Authority (FCA) last May, the low levels of suitability the regulator had found in pension transfer advice were an indication conflicts of interest created by contingent charging were "not being managed successfully across the market".

But in his latest submission Mr Richards said: "What we must we do as a profession is recognise that in certain areas a conflict will exist – you can’t remove the conflict, so therefore what you have to do is demonstrate how you recognise the conflict and mitigate the risk in the actions that you take."

The professional body stated the separation of an initial review or recommendation fee from a transaction could be a way of demonstrating and mitigating the potential conflict, as well as setting client expectations that a transfer may not be a suitable recommendation from the outset.

"If the recommendation is to proceed however, contingent charging is more often the preferred and most convenient option for clients," it added.