The financial regulator estimates the advice market will see its revenue drop by as much as £445m a year as a result of the ban on contingent charging.
According to the regulator's own calculations, the ban will cost advisers between £360m – £445m a year in lost revenue as a result of a drop in demand for and a lower cost of pension transfer advice.
This is alongside an estimated cost of between £399m - £598m in lost fee revenue as more consumers, who opt to transfer, transfer into workplace pension schemes as opposed to self-invested personal pensions, and as such are less likely to require ongoing advice.
This morning (July 30) the Financial Conduct Authority proposed a ban on contingent charging as it warned the proportion of consumers advised to transfer out of defined benefit pensions was currently too high.
The City-watchdog said it expects the advice market for pension transfers to shrink even further following its intervention, stating it may result in "some advisers withdrawing from the market and some consumers being unable to afford or access advice on whether to transfer".
But the FCA said it expects its remedies for the market to be "net beneficial" as consumers will benefit from a reduction in the amount of unsuitable advice and a drop in the price of initial and ongoing advice.
The regulator estimated consumer savings of between £360m - £445m a year in reduced advice costs and £952m - £1.59bn a year in fewer instances of unsuitable advice, as a result of the ban on contingent charging.
The FCA said it intended its incoming policies in the pension market to "discourage higher-risk firms" from operating in the sector.
The regulator said: "If firms believe they need to charge more for advice to transfer, due to the risk of it being unsuitable, they should be reconsidering whether they are competent to provide suitable pension transfer advice at all.
"Firms should also note that we have discussed our view of suitable advice with the Fos and we consider that our approach to considering suitability is consistent."
The watchdog said it believes that at least some firms that charge on a contingent basis are taking advantage of "poor consumer knowledge about pensions and advice", with instances of advice charges of £30,000 on transfer values of £900,000-£1m.
The FCA said: "They charge high amounts for advice on a contingent basis where the level of the charge is dwarfed by the transfer value and its deduction from the transferred funds may not be clearly observed by the consumer.
"Firms with high conversion rates are advising on average transfer values of nearly £400,000. In such cases, typical contingent charges result in fees to £8,000- £12,000."
The regulator instead suggested firms should be charging in the region of £3,000-£3,500 for non-contingent advice and said if some companies can charge this fee whilst incorporating a profit margin, others should be able to do so too.
The FCA added: "Based on our supervisory work, we consider that good quality, suitable advice should take 20-25 hours, some of this undertaken by a pension transfer specialist , and the rest by support staff.
"Using typical market charge out rates (£200 per hour for a pension transfer specialist as set out in paragraph 40 and half of this for support staff), and assuming that the pension transfer specialist carries out half of the hours, this produces a charge to the client of £3,000-£3,500 which will include an allowance for overheads and a profit margin."
rachel.addison@ft.com
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