Defined Benefit  

Has the contingent charging ban been a positive step?

“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.