Gem Durham, independent financial adviser at Obsidian, warned of this unintended consequence in a letter to Steve McCabe, Labour MP for Birmingham, Selly Oak, and member of the Work and Pensions select committee.
She wrote: "There would be a danger that unscrupulous advisers would benefit from this [ban] - by charging people a reasonably large sum of money in order to say no - without really looking at that client and their individual needs, just as much is happening now when transfers go ahead, and indeed with less fear of future reprisal."
FTAdviser reported last week that the committee will push for legislation on a contingent charging ban if the Financial Conduct Authority doesn’t act to ban the practice.
Ms Durham told Mr McCabe that she knows one customer who has been charged £3,000 on a non-contingent basis by a large firm, and he was advised not to transfer - he then had to find that £3,000 from his own savings.
She added: "Based on his circumstances, I am not convinced that a no was right for him, and neither is he."
Contingent charging means a client only pays for the advice if they go ahead with the transfer, which the FCA is concerned could create a conflict of interest and lead to more people being told to transfer.
The regulator's stance is advisers should work from an assumption of no transfer but it has been clear in the past that both advice to transfer and to not transfer must pass the suitability test.
The FCA had already consulted the industry on contingent charging last year but decided against a ban in October, despite finding widespread problems in the suitability of pension transfer advice.
The regulator then stated it will consult on this topic again if it considers that changes are needed.
Simon Harrington, senior policy adviser at the Personal Investment Management & Financial Advice Association, agrees that a ban can bring this new risk to the market.
He said: "As we saw from the Rookes Review [of The Pensions Regulator's work in the British Steel case], the most active advisers in this space in Port Talbot were charging a diminished upfront fee on the understanding of facilitating a transfer, rather than contingently.
"This is merely a reverse engineering of the same principle – albeit one that in the long run carries a smaller financial reward.
"We’ve been clear throughout this process that removing contingent charging does not preclude bad advisers from providing bad advice, it will merely push vulnerable and insistent individuals towards unscrupulous individuals seeking to profit off them."
Mike Lacey, partner at Berkshire-based financial adviser firm Bowman Pension Consulting, said recommending clients not to transfer was also an easy way out for advisers, "in order to minimise risk of a claim in ten years, and – even worse – to avoid the lengthy process involved in recommending and effecting a transfer of safeguarded rights".
He added: "Given the FCA’s default is ‘stay put’ it would be difficult for a claims management company to pursue an action for a claim in twenty years’ time. One would hope.”
maria.espadinha@ft.com
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