Defined BenefitJul 7 2021

Has the contingent charging ban been a positive step?

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Has the contingent charging ban been a positive step?
Pexels/Andrea Piacquadio

It has been almost nine months since the contingent charging ban on defined benefit transfer advice came into effect.

So what impact is the ban having?

Last month, figures from LCP showed that DB transfers had fallen to their lowest level in five years.

Analysis from the consultancy found that in Q3 2020 only 25 out of every 10,000 members transferred out of their DB pension into a defined contribution plan, down 62 per cent from its peak in Q3 2017 and the lowest level since 2016.

Fiona Tait, technical director at Intelligent Pensions, says: “The ban will certainly have had an impact on those advice firms who previously operated a contingent charging model, but there are knock-on effects for other advice firms as well.“

Tait says that while Intelligent Pensions did not operate a contingent model, it did have a separate implementation fee that was only charged if this work was carried out.

She adds: “Under the new rules we are obliged to charge exactly the same whether or not a transfer is recommended, and we have had to factor this into our initial charges. 

“While we fully support the removal of contingent charging, it may be that the impact of cross subsidy has now shifted too far, so that those who do not transfer are now cross subsidising the costs of those of who do.”

Under the new rules we are obliged to charge exactly the same whether or not a transfer is recommended - Fiona Tait, Intelligent Pensions

Darren Cooke, chartered financial planner at Red Circle Financial Planning, adds: “I suspect the ban has led to a lot less people taking advice because they won't want to, or can't afford to pay a fee if the answer to transfer is no. We can't be certain if it is driving different behaviours until we see the stats for transfers post the ban.”

However, Cooke says he does not think the ban completely removes the incentive to transfer for the adviser.

He says: “The upfront fee will still be paid to transfer or not, but if the client doesn't transfer then there is no ongoing servicing fee on the transferred pot. Those fees, over many years, will far outweigh any initial fees anyway, so there is still a bias to transfer.”

David Boyhan, technical director at TCC, argues that although the DB market is less buoyant now, this is not due to the ban on contingent charging. 

“Many firms pulled out of the DB market prior to the ban on contingent charging, and few we have spoken to have cited the ban as a reason for leaving the market”, he adds.

“We have definitely noticed a marked improvement in DB transfer advice, partly due to the ban on contingent charging. However, we believe the improvement has been mainly driven by firms’ better understanding of the [Financial Conduct Authority's] expectations of advice in this complex area.  

“DB transfer advice we review is generally more suitable now than it was immediately after pension freedoms.”

When the FCA announced its plans to ban contingent charging on DB transfers, it said it was concerned that too many advisers were delivering poor advice, much of it driven by conflicts of interest in the way they were remunerated.

In particular, it said the practice of contingent charging created an “obvious conflict”, where advisers only get paid if a transfer proceeds.

Following the ban, a report back in March by Aegon and Next Wealth, Managing Lifetime Wealth: retirement planning in the UK,  found there had been a significant decrease in the number of companies providing DB transfer advice over the past year. 

The study showed the proportion of adviser companies offering DB transfer advice dropped by nearly half to 22 per cent.

The research also showed an increased support for ‘abridged advice’, with 60 per cent of advisers agreeing it is an effective way of identifying unsuitable transfers.

Tait says, on balance, she believes the ban is driving the right kind of adviser and client behaviour.

“The charging for the advice delivered regardless of outcome is fairer for advisers as they know they will be paid for the work done whatever the result, and for clients because advice against a transfer where this is in their interests is of much greater value than simply acting as an order taker,” Tait says.

But she adds – agreeing with Cooke – there is still an element of conflict, since advisers that recommend a transfer may receive ongoing management fees as a result.

Most clients who do transfer are already at or near retirement, and an ongoing service is almost certainly going to be necessary to help them manage ongoing income.

Conversion rates on DB transfers have been one of the metrics the FCA used to judge the state of the DB transfer market.

Data from the FCA, obtained by LCP through a Freedom of Information request, showed there was a big gap in conversion rates between advisers that had a contingent charging model and those that did not, from October 2018 to March 2020.

It was found that those with contingent charging had conversion rates of 68.25 per cent, while for those with a non-contingent model it was much less at 27.97 per cent.

Boyhan says these statistics are compelling and demonstrate a tangible link between the charging model and client outcome, supporting the FCA’s decision to ban contingent charging. As a result of the ban, these statistics indicate that conversion ratios will be lower in the future and advice is more likely to be suitable.

Meanwhile, Kate Shaw, chartered financial planner at Financial Life Planning, says she was not surprised by the figures, even though conversion rates at companies with a non-contingent policy was still quite high.

She adds: “For comparison, my conversion rate this year so far is running at just under 5 per cent. That’s slightly lower than usual; over the course of an average year I’d expect it to be around 10 per cent, and I have never charged on a contingent basis.

“I think in the end that if somebody wants to do a transfer, they will do it. There’s only so much tinkering with the rules that can make a difference – in the end it comes down to the integrity of the adviser.”

Tait adds: “Banning contingent charging removed an obvious conflict of interest and was a positive step in any case. These figures serve to reinforce that decision and remove the counter argument that there was no actual evidence of consumer detriment. 

“That said, it might be more useful to look at the percentages transferring relative to the number of scheme members, rather than just those who have taken advice. Given the cost and difficulty of finding advice, a significant proportion of those who proceed this far do in fact have good reasons to transfer, particularly since the advent of triage and abridged advice.”

Ima Jackson-Obot is deputy features editor of FTAdviser