Defined Benefit  

FCA to ban contingent charging on DB transfers

FCA to ban contingent charging on DB transfers

The Financial Conduct Authority is proposing a ban on contingent charging, with some exceptions.

In a consultation paper out this morning (July 30) the watchdog stated that given the advantages of defined benefit pensions, the proportion of consumers advised to transfer out was too high.

The regulator believes that many of the transfers that have taken place will not have been in consumers’ best interests.

Due to this, the FCA is proposing a ban on contingent charging, with the exceptions of specific groups of consumers with certain identifiable circumstances, such as individuals suffering from serious ill-health or experiencing serious financial hardship.

In the minority of cases where contingent charging is permitted, advice firms will have to charge the same amount, in monetary terms, for advice to transfer as they charge when the advice is non-contingent.

The FCA is also suggesting a short form of advice, which can result in a recommendation not to transfer, and would fall outside the proposed ban on contingent charging, since the regulator expects costs to be much lower.

Christopher Woolard, executive director of strategy and competition at the FCA, said: "The FCA’s supervisory work has revealed continued problems in the pensions transfer advice market.

"By making changes to the way advisers are paid for transfer advice and the other changes to transfer advice we are proposing today, we want to ensure people receive suitable advice and drive down the number giving up valuable defined benefit pensions when it is not in their interests to do so."

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 on contingent charging is that 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 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 would consult on this topic again if it considers that changes are needed.

But the Work and Pensions select committee has warned it will push for legislation on a contingent charging ban if the Financial Conduct Authority doesn’t act.

maria.espadinha@ft.com

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