Client comms is important ahead of contingent charging ban

After debating the issue for at least two years, the FCA has finally come down on the side of banning contingent charging for advice given on defined benefit (DB) transfers.

The FCA felt it created too much of a conflict of interest and was likely to result in bad advice.

So, from 1 October 2020 contingent charging – where a fee is only paid if the transfer goes ahead – will not be allowed unless the client falls into one of two specific ‘carve-out’ exemption categories. 

However, the FCA is not a trusting soul.

Rule changes

It has also included several measures to prevent advisers from ‘gaming’ the ban.

It has put together a list in the COB rules of ‘examples of unacceptable practices’ as an attempt to block out as many pseudo contingent charges as it can – almost like an elaborate game of ‘whack-a-mole’. 

For example, advisers cannot say they charge the same for advice regardless of whether the transfer goes ahead, but then not take steps to enforce the full payment.

Another area is that payments to third parties, such as introducers, should be the same amount whether or not the consumer transfers their pension. 

The FCA is also worried some advisers – particularly vertically integrated firms (VIFs) - would cross-subsidise pension transfer advice with product charges and therefore use their business model to undercut other advice firms.

But it believes its existing rules and the new rules introduced will stop this. 

Likewise, it was aware some advisers may try to backload advice charges to try to artificially lower the transfer advice fee.

So, it’s taken action to require ongoing advice charges in the individual pension contract to be the same regardless of whether the source of the pension fund is a DB transfer or not. 

Leaving no stone unturned

A couple of the measures were concerned about other charges being added onto the basic advice charge but only applying – or being higher - when the transfer goes ahead.

One example is the meshing together of pension transfer costs and implementation costs. 

The FCA had signaled in consultation that it didn’t want implementation costs to be separate from pension transfer advice costs.

The FCA is also worried some advisers – particularly vertically integrated firms (VIFs) - would cross-subsidise pension transfer advice with product charges.

This prevents an adviser from charging a small amount for transfer advice but a larger amount for implementation costs incurred only if the transfer goes ahead, effectively meaning a watered-down version of contingent charging could continue.

Some respondents to the consultation felt this approach would be unfair – consumers who do not transfer would end up paying for services that they don’t use, and that only those who transfer receive.

But how to get around this sticking point? The FCA felt allowing genuine implementation costs to fall outside the ban would only lead to some gaming the ban.

And the idea of introducing rules on what a reasonable implementation cost would be felt like a convoluted step too far to the FCA. After all, it says it is not a price regulator.

In the end, in the policy statement the FCA is asking advisers to set an average charge for their activities – for example based on the average number of hours it takes to give advice.

The firm then charges clients this same amount regardless of whether they transfer or not. 

The implementation turn-around time for these new rules is short.

Firms need to spend time over the next few months ensuring their charging structure meets these new requirements, but also that they are communicating it in the right way to clients so they know what they will have to pay. 

Rachel Vahey is a senior technical consultant at AJ Bell