Bank of England governor Andrew Bailey has defended the delay in introducing the contingent charging ban during his time at the Financial Conduct Authority.
Speaking to the Public Accounts Committee yesterday (June 13), as part of its inquiry into the British Steel Pension scheme transfer saga, Bailey said the regulator did not take immediate action for the ban as it had to “work out what was a better approach”.
Bailey was head of the FCA from 2016-2020 at which time it came to light that thousands of steelworkers had been misadvised to transfer out of their defined benefit pension scheme.
During this time, firms and advisers were financially rewarded to recommend steelworkers to transfer their pension scheme under the contingent charging approach which means a client only pays for the advice if they go ahead with a transfer.
Speaking yesterday, MP Nick Smith said in January 2018 the work and pensions committee recommended a ban on contingent charging and asked Bailey why the FCA did not act on it.
Bailey said the regulator had to work out what was a better approach and that was not obvious at the time.
“It became obvious later,” he said. “The simple approach was saying don't do contingent charging, just charge over the lifetime of the contract. The evidence suggested that led to much higher charges.
“The idea of charging everybody whether you transfer out or not, I think would have had quite an effect of killing the pension freedoms.”
Bailey argued that the problem solved itself when workplace pensions were introduced as they had a charging structure attached to them, which he said the FCA saw as “reasonable".
“We adopted that change when that came into effect because we were looking for a reasonable and sensible alternative to contingent charging and that was it,” he said.
However, Smith said the ban did not come into force for another 15 months, during a period when the NAO report said 60 per cent of firms were using contingent charging in pension transfers.
“Well, I and my colleagues were never supporters, particularly of contingent charging. We were looking for a better method because we can see alternatives that were just as bad frankly,” Bailey said.
He added: "We were looking at the wider market and the evidence was the alternatives were associated with mis-selling as well."
The former FCA boss was also asked what he thought of the way the BSPS case was handled.
“Please don’t think the FCA was sitting on information and not doing anything as that is not the case," he said. “Consumer protection is a constant challenge because the world evolves around us constantly. The case we are looking at is the most complex piece of advice anyone can take.
“As a regulator there are relative judgments, and you have to focus your resources. In my opinion the Sipp [self-invested personal pension] issue was even bigger. At the time. If we could have got the targeted warnings out much earlier, we would have.”