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How can advisers navigate the contingent charging ban?

This article is part of
Guide to advice and guidance

How can advisers navigate the contingent charging ban?

The FCA’s plans to ban contingent charging in all, but a small number of defined benefit (DB) transfers, is an indication of the level of concern the regulator has about this area of advice.

For some time now, the FCA has raised concerns that contingent charging for DB transfers can create conflicts of interest and lead to cross-subsidies and opaque charging. 

However, it also recognised that an outright ban could widen the advice gap. 

In June the FCA published the results of its survey of 3,015 firms between April 2015 and September 2018, concluding that too much of the advice it has seen was "still not of an acceptable standard".

It also voiced concern about the volumes of recommendations, with 69 per cent of individuals having been recommended to transfer.

The findings of its most recent suitability review, which found a far higher percentage being recommended to transfer than the FCA believes is appropriate, ‘intensified’ its concerns over contingent charging. 

Contingent charging

The Work and Pensions Select Committee has been a particularly strong critic of contingent charging and even the adviser community is divided on its merits for DB transfer advice .

Steven Cameron, pensions director at Aegon says in responding to previous consultations, the firm called for contingent charging to be allowed to continue, provided conflicts of interest could be managed effectively, to offer clients choice on how they pay for advice.  

Mr Cameron adds: “We believe the Personal Finance Society’s Pension Transfer Gold Standard sets out some effective ways of managing conflicts.

“However, it’s no surprise that the FCA is now proposing a ban of contingent charging, specifically for DB transfers. There are some carve-out groups and we hope these, plus the proposed abridged advice, will help limit the extent to which a ban will make the DB advice gap bigger.”

The FCA accepts that for some, contingent charging is the only feasible way of paying for advice

Mr Cameron explains this must cover the costs of implementing the transfer even though this, and resulting PI cover, do involve additional cost. The FCA also sets out further conditions to prevent ‘gaming’ through allocating or offsetting charges for DB advice elsewhere.

Payment alternatives

While outside of the FCA’s remit, it has shared with the government other proposed solutions including paying for advice through a deduction in DB scheme benefits or encouraging more trustees to offer partial DB transfers.

Mark Turner, a managing director in the UK compliance and regulatory team at consultancy Duff and Phelps says: “The concept is a good one. It removes substantial conflicts of interest which has been in the industry for a long time around DB transfers.

“It does make sense to me that advice is charged on whether, not to proceed, or to proceed. The only issue is for those on low income or who do not have the ability to pay for the advice upfront."