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.
Paradoxically, however, a reduction in the number of transfers taking place could strengthen the argument of the contingent charging critics.
Transfer values remain near record highs, meaning the number of DB transfer enquiries is likely to stay elevated for the foreseeable future. If advisers using contingent charging remain willing to accept this work, but ultimately recommend a transfer less frequently, the charges levied on transfer activity will increasingly fail to subsidise the cost of assessing clients who stay put.
The FCA makes this point itself in the consultation paper. It is an argument that favours further action from the watchdog.
Being upfront
Many advisers already shy away from contingent fee structures. Mike Horseman, managing director of Midlands-based adviser Cockburn Lucas, says the amount of work involved in advising on pension transfers necessitates the use of an upfront charging model.
He says: “At this stage, we say no [to a transfer] more times than we say yes, and there is as much work to say no as there is to say yes. Not charging for that work would be a very silly commercial decision.”
As the FCA suggested, upfront charging would be a barrier to those with few assets. Mr Horseman says that such clients should not be transferring at all. “Surely to transfer away you need to be able to take risk. If you haven’t got enough money in the bank to cover a non-contingent fee, or indeed you don’t see the value of that, or your transfer value is so small, why would you even be contemplating a transfer?”
Ms Ingram notes there are exceptions – such as if a client has a terminal illness but few non-pension assets, and wants to use the increased flexibility of the pension freedoms to give more money to their family. But she says these scenarios are “few and far between”. She agrees with Mr Horseman that the advice gap argument may be a red herring: “If someone has got no money and no savings, that is a very strong indicator that they should not even be considering transferring.”
Ongoing issue
One point raised by those against a contingent charging ban is that the fee structure is not so different from a traditional advisory model. Ongoing advice fees are effectively the same thing as contingent charges, they say. For pension transfers, both are only levied in the event of a transfer going ahead.
The FCA also nods to this fact in its consultation. It says a ban would not remove the incentive to recommend a transfer for advisers who are likely to be retained to provide ongoing advice in relation to the transferred amount. “This is particularly likely where all elements of the advice are given by one adviser,” it adds.
Alistair Cunningham, of Wingate Financial Planning, echoes that point. “Even independent firms have a bias through ongoing adviser fees,” he says.
For Mr Cunningham, there is no single solution to the problem. Rather the advice industry should recognise the potential partiality of all kinds of fee structures and business models.
“The solution is for all firms to recognise they are biased, and contingent charging is just one of many forms of bias,” he says.
“High-impact, irreversible decisions are where biases do the most damage and firms should take the time to understand how to mitigate these biases. A ban on contingent charging may reduce one incentive to transfer, but it is no ‘magic bullet’ to improve the quality of advice.”
On the other hand, Mr Percival believes it is the rise of non-contingent charging that will ensure advisers’ business practices become more sophisticated.
“I think non-contingent charging would be one of the indicators that [what] one could now call a nascent profession is becoming an established profession. The clients are paying for the expertise and the professionalism of the adviser by paying for the advice rather than paying at the transaction and implementation stage. It’s the way the sector needs to go.”
The advice profession will find out whether it will be able to make this shift on its own, or whether the change will be forced upon it, after the FCA consultation closes on 25 May.
