The Financial Conduct Authority’s proposed ban on contingent charging has caused a stir among advisers and providers, with many concerned it will lead to unaffordable advice and will not be implemented effectively.
In a consultation paper out this morning (July 30) the watchdog proposed a ban on contingent charging, after previously dismissing the idea, with some exceptions.
The FCA proposed specific groups of consumers with certain identifiable circumstances, such as individuals suffering from serious ill-health or experiencing serious financial hardship, should be excluded from the ban.
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 regulator had changed its mind due to concerns the practice was leading to more people being told to transfer and a potential conflict of interest for advisers.
But advisers have raised concerns a ban could leave consumers unable to access pension transfer advice.
David Penney, director at Penney, Ruddy & Winter, said: “I must admit I’m surprised, but I have said for some time that contingent charging should be banned or at least discouraged.
“Might this lead to higher advice fees? It will certainly create a hole in the revenue of firms who specialise in defined benefit transfers.
“If they were charging £10,000 for a transfer, will they now charge £10k for a report?”
Former pensions minister and director of policy at Royal London, Steve Webb, thought the proposed changes would help to reduce the risk of consumers transferring into “poor value destinations” but said the FCA would need to counter such moves with new ways of making transfer advice affordable and available.
He added: “Consumers should also have a right to a partial DB transfer to reduce the all-or-nothing nature of too many transfers.
“Until now, FCA actions have reduced the supply of DB transfer advice and raised the cost, driving some high quality advisers with unblemished records out of the market altogether. This has to change.”
Contingent charging means a client only pays for the advice if they go ahead with the transfer.
The regulator's stance is that advisers should work from an assumption of no transfer and 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.
Mike Barrett, consulting director at Langcat, said it appeared political pressure from the committee had convinced the FCA to take action.
He added: “While this is a still a consultation, and any ban is unlikely to be implemented until well into 2020, it appears the game is up for any adviser firms operating a contingent charging model for DB transfer advice.”
Simon Harrington, senior policy adviser at the Personal Investment Management & Financial Advice Association, thought the FCA’s proposals for a ban were wrong but was pleased to see the regulator taking steps to ensure individuals could get support through a “more robust triage process”.
Alastair Rush, principal at Echelon Wealthcare, said on Twitter: “I’m conflicted. I think it has its place if done properly.
“[It is] sad for those in a small minority who would benefit but who can’t get their hands on the cash immediately.
“It depresses me that many good advisers, working away diligently in a quiet majority, get overshadowed by sub-standard practitioners.”
But Kay Ingram, director of public policy at LEBC, welcomed the news. She said: "FCA‘s ban on contingent charging for DB transfer advice is welcome news. It gives consumers better outcomes by removing conflict of interest and a greater likelihood of impartial advice."
Andrew Tully, technical director at Canada Life, agreed with the FCA that if advisers were only paid if a transfer proceeds that created a conflict of interest, but he argued it was “almost impossible to show a link between contingent charging and unsuitable advice”.
He added: “While it is right we have strong controls and scrutiny of transfers, we need to be careful not to demonise all transfers and those involved in them.
“Otherwise, we run the risk of stopping people exercising control over their pension savings, and preventing some from achieving the best outcome.”
imogen.tew@ft.com
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