With the publication of its policy statement 20/6, the Financial Conduct Authority has sought to remove the conflict of interest that may be evident through contingent charging, which it deemed to potentially incentivise advisers to recommend a transfer.
While the majority of advisers may not agree that the move will improve outcomes, the potential for contingent charging to be contributing to what the FCA says is a high incidence of unsuitable advice was enough to prompt it to act.
How did we get here?
Since pension freedoms were introduced in 2015, the FCA has confirmed that approximately 235,000 DB members have received advice on transfer values totalling over £80bn.
Given the FCA requirement that the starting point for advice should be that a transfer is unlikely to be in the client’s best interests, it is surprising that more than 170,000 of these members were advised to transfer benefits to a defined contribution arrangement.
These figures are far too high to expect the FCA to not intervene.
- The FCA has banned contingent charging
- It has concluded that too many clients are transferring their DB pensions to a DC scheme
- Clients may underestimate the value of a guaranteed income
Now if we assume that each of those 170,000 recommendations to transfer were in the client’s best interests, this could then cast doubt on the numbers quoted by the FCA of individuals seeking advice.
In practice, it is likely there are a large number of potential clients who withdrew from the advice process following triage – the process used to educate clients on the drawbacks and benefits of a potential transfer prior to progressing to regulated advice.
However, the FCA has deemed that having over 70 per cent of cases that proceed to regulated advice resulting in a recommendation to transfer is unacceptably high and counter to its initial assertion that it will not be in the best interests of the client in the majority of cases.
One of the conclusions drawn by the FCA was that advisers are potentially being financially incentivised to recommend a transfer if their fees are structured in a manner that results in a higher charge following a transfer.
Coupled with ongoing advice charges, this can have a significant negative impact on transferred funds and, as a result, the client’s retirement income and financial security.
The way forward
The ban on contingent charging provides advisers with the opportunity to review their advice process and potentially move to an even higher level of professionalism.
As qualified specialists, clients should not be paying for a transfer but for the detailed analysis undertaken to assess whether it is in their best interests to take this life-changing decision.
Many clients may not have realised they were sitting on a pension valued in the many hundreds of thousands of pounds.
In these situations, advisers are often faced with clients with a preconceived notion that a transfer is in their best interests due to the large sums made available to them.
Given the current financial situation many will find themselves in, with the fallout from coronavirus still unveiling itself, clients may see the large sums offered by pension trustees as a way of relieving some financial pressure.