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.”