Defined BenefitJun 5 2020

Advisers warn of consequences from contingent charging ban

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Advisers warn of consequences from contingent charging ban

Advisers operating in the defined benefit transfer market have warned the regulator’s ban on contingent charging will push up charges and act as a barrier to advice which could ultimately lead to poorer outcomes for clients.

Advisers have flagged concerns that the DB advice market will continue to shrink following the Financial Conduct Authority's announcement this morning (June 5) of a ban on contingent charging from October.

According to Alistair Cunningham, financial planning director at Wingate Financial Planning, the FCA’s proposals are “flawed” and biased towards wealthier individuals.

Mr Cunningham said: “The FCA seems to be of the opinion that wealthier people are more likely to benefit from a transfer for inheritance tax or wealth management reasons. 

“I see how these might be perceived to be benefits, but many wealthy people have built a lifestyle that requires more income to maintain. Why are they less deserving of guarantees? They are of course more likely to pay for advice on a predictable (non-contingent) basis.”

Meanwhile Dominic Murray, independent financial adviser at Cameron James, is concerned more clients will be determined to transfer following the ban.

Contingent charging means a client only pays for the advice if they go ahead with a transfer.

But Mr Murray has warned charging on a non-contingent basis could encourage more people to transfer as they will have to pay for the cost of advice either way.

He said: “We welcome any regulatory changes that improve client outcomes. A ban on contingent charging will almost certainly reduce the number of unsuitable transfers and improve the quality of advice in the market.

“However, there is also a danger that a non-contingent charge could make clients more determined to transfer once a fee has been paid.”

He also warned the higher upfront charges would “undoubtedly act as a barrier” to many clients where a transfer may be suitable, which could adversely affect their financial planning. 

Ambiguous carve outs

The contingent charging ban will not apply in all situations. For example, those suffering from serious ill-health or experiencing serious financial hardship will be exempt.

But Mr Cunningham is concerned these carve outs are too broad.

He said: “Health and hardship are the two reasons I can see validity in a transfer, and the former can lead to the latter (particularly in a world of Covid-19 shielding), my expectation is less scrupulous firms have now been given carte blanche to transfer.”

Keith Richards, chief executive of the Personal Finance Society, is also concerned the broadness of the carve outs will lead to advisers reaching different conclusions.

He said: “We are concerned that the exception to ban contingent charging for ‘specific groups of customers with certain identifiable circumstances’ will put pressure on advisers to facilitate pension transfers in ambiguous situations.”

“For example, it is often very difficult to predict the precise impact of poor health on longevity, and these rules will put advisers in a position where they have to make a judgement on client’s health that could either leave the client disappointed, or create issues with compliance with the FCA’s rules.”

A shrinking market

Meanwhile, Simon Harrington, senior policy adviser at Pimfa, believes supervision of the market rather than changes to charging structures would have been more effective to improve client outcomes.

He said: “The FCA fervently believes that changing the charging structure for pension transfers will improve the quality of advice given and as a result it seems clear that this hypothesis should be tested. 

“We have been clear throughout our engagement with the FCA that the way to identify poor practice and ultimately remove it from the market is through effective supervision which we consider to have been lacking especially in this market.

“One wonders what the response will be a year hence if the quality of advice remains largely the same.”

According to Pimfa, the ban will lead to fewer firms operating in the market with most transfers being carried out by a select number of larger firms.

Mr Harrington added: “Fewer people will access advice as a result of this. The regulator stated as much in its response this morning. 

“Conversely, it isn’t immediately clear to us that this will have a significant impact on the PI market. 

“There are of course broader, systemic issues in that particular market which need addressing. Of greater concern should be the rise of claims management companies identifying the pensions transfer market as their next business opportunity.”

The FCA believes a better functioning market will lead to shrinking PI costs for advisers.

amy.austin@ft.com

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