It is perhaps inevitable that it has come to this. After months of focus on the ballooning levels of defined benefit (DB) transfer activity, coupled with the alarming headlines that emerged from Port Talbot at the end of last year, the FCA has said it may consider a ban on contingent charging structures.
The regulator’s latest consultation on DB transfers, launched in April, announced it was seeking views on whether it should “restrict the way in which pension transfer advice can be charged”. Contingent charging was not mentioned in the watchdog’s 2017 consultation, but its latest paper acknowledged respondents had provided “significant feedback on contingent charging and its potential for consumer harm”.
The FCA said such charging structures could take advantage of consumers’ in-built biases (see Box 1), such as misjudging the risk of funds running out in retirement, and “distance” them from the exact amount they pay, because fees are taken at the end of the process and are usually dwarfed by the value of the transfer.
From an adviser perspective, the FCA’s concern is one often voiced by critics of contingent charging: that the practice represents a fundamental conflict of interest.
Plenty of industry figures continue to favour a ban. Kay Ingram, chair of national IFA LEBC, says contingent charging “trivialises” the question of whether or not to transfer in the mind of the client. “It’s not something consumers should be encouraged to look upon as an issue they can just deal with quickly and not pay full attention to,” she says.
“I think it’s important consumers understand this is not a one-off decision: if you do this, you’re committing not just your money, but your time to managing this. And that’s something advisers need to make clients aware of and not just do on a no win no fee basis.”
But the immediate question is whether a mooted ban – one of three fee-based questions posed by the FCA (see Box 2) – would be at all feasible.
The watchdog has recognised that the issue is complex. It suggested that, to ensure advisers did not “game the system”, any clampdown might have to ban contingent charging for advice on the destination scheme and investments, as well as the transfer itself. It also acknowledged that consumers’ ability to access advice may be hampered by a crackdown.
Rory Percival, a former FCA technical specialist who now works in consultancy, says these issues lead him to suspect a ban is unlikely. He explains: “I don’t think it will bring a ban in, for two reasons. One is the Financial Advice Market Review – [specifically] the small category of clients who cannot afford access to advice.
“The second is the technical difficulties around it, which are quite rightly flagged up in the consultation paper. There are some things you can do to navigate around these technical issues but it’s quite difficult to supervise.”
Doing nothing: not an option?
Unfortunately for the regulator, sitting on its hands brings risks of its own. It remains to be seen whether the increased scrutiny – on the fate of British Steel Pension Scheme members, on adviser transfer practices in general via an ongoing FCA review, and now on contingent charging – will put a dent in transfer activity in 2018. If it does, the watchdog may face less pressure from the likes of the Work and Pensions Committee, which has recommended a ban on contingent fees in relation to pension transfers. Indeed, the regulator may assume that its increased monitoring has ensured advisers act with due care on transfers, making further rule changes unnecessary.