Pensions  

Advisers warned of FCA action on contingent charging

Advisers warned of FCA action on contingent charging

The Financial Conduct Authority could take action on the use of contingent pricing in defined benefit transfers, advisers have been warned.

Contingent pricing, which allows advisers to only charge a client if the transfer goes ahead, has raised concerns about conflicts of interest.

FCA rules state that when an adviser charges on a contingent basis they should consider conflicts of interest and ensure there are “appropriate controls” in place.

But Andy Sutherland, managing director of advisory services at consultancy firm TCC, warned that regulators could be looking at this practice.

He said: “It feels like it is more than a quarter of firms who are doing this – and it is RDR compliant.

“If you get 6 per cent of the transfer if it goes ahead and you get nothing if it doesn’t, then you have got to have some pretty strong morals.

“There is talk that the FCA will remove it.”

There has been a post-Brexit surge in transfer values prompted by the plunge in the value of sterling since the referendum.

At the end of March a DB pension worth £10,000 a year would have delivered an average lump sump of £237,000 compared to £210,000 in early June 2016.

Financial advisers, product providers and DB pension consultancies have reported a huge surge in interest in DB transfers, which they all link to pension freedoms and high transfer values.

The latest research showed more than 500,000 people have cashed in a total of £9.2bn from their pension pots in the two years since the pension freedoms were launched.

Keith Richards, chief executive of the Personal Finance Society, said: “No one should underestimate the regulator’s concern over the potential conflicts of interest - which is why commission was abolished - and the society continues to emphasise the importance of putting in place appropriate controls to manage these risks.

“Given the considerable spike in activity, I have no doubt that a thematic review from the regulator is coming, so there has never been a more important time to be extra rigorous.”

But he said any concerns the FCA had about advisers’ use of contingent fees were likely to be proved largely unfounded. 

Consultant and former FCA technical specialist Rory Percival said there was the prospect of bias if an adviser was paid £10,000 or more for carrying out a transfer.

He said: “The market has become significantly more professional than it was six or seven years ago but it has got a way to go before it becomes a true profession.

“The basis of charging will be one of the key indicators of whether it has become a profession.

“If contingent charging has all but disappeared then that will be a good indicator that the sector is now a profession but I don’t see that happening in for 10 or 15 years.”

But he was doubtful that the FCA would take action itself in the near term, and said it was up to advisers themselves to take the initiative.