In its ‘Improving the quality of pension transfer advice’ consultation document, the FCA included discussion questions around the different charging structures used in pension transfer advice.
It focused on contingent charging, where an adviser is generally only paid if a transfer takes place.
The regulator identified a number of issues; including cross-subsidies, where the cost of advice for those who do not transfer is offset by those who do.
The feedback document, published 4 October, stated that “contingent charging generally results in higher charges for those who transfer than a non-contingent model”.
British Steel scrutiny
The contingent charging model came under intense scrutiny during the British Steel Pension Scheme scandal, where workers were forced to transfer their pension from the existing scheme. Some fell prey to unscrupulous advisers eager to make money off of the high transfer values some of the steel workers were quoted.
At the time, Eugen Neagu, head of financial planning at Montfort International, spoke to International Adviser and warned that the practice of charging only for when a transaction is done “creates a bias for advisers to recommend a transfer”.
“I have found many times, even with steel workers, that they do not want to pay fees. They then go to advisers who charge on a contingency basis and are, in my opinion, less qualified and less knowledgeable.”
However, the FCA stated on Thursday that the causal ink between contingent charging and unsuitable advice is “not clear-cut”.
Three key issues
In its discussion questions, the FCA focused on potential consumer harm and asked for views on whether intervening on charges was an appropriate response to the broader harm of unsuitable advice.
- Whether contingent charging increases the likelihood of unsuitable advice and, if so, whether respondents could provide evidence to support the FCA intervening in the way pension transfer advice is charged;
- How any restriction on the way pension transfer advice is charged should be implemented, particularly how to prevent the ‘gaming’ of restrictions; and,
- The impact different forms of restrictions on charging might have on consumes and firms and how the FCA might minimise any harm, such as reduced access to advice.
The feedback from respondents was polarised, with a small majority of respondents arguing against any prohibition on the charging model.
The group opposed to the ban cited the availability of advice in future as a key concern. They suggested that vulnerable consumers may not be able to access advice and income-poor but pension-rich people may be prevented from accessing the pension freedoms.
They argued that the DB advice market could become the preserve of only wealthy consumers or that people with smaller pots would shop around for advisers known to be sympathetic towards transferring.
Although they acknowledged that contingent charging models were bound to lead to some biases, respondents felt it was hard to demonstrate definitively that these models increased the likelihood of poor advice.
In contrast, those supporting a ban saw these charging model as a cause of conflicts of interest. They also argued that it incentivises a recommendation to transfer and is a driver for a significant portion of poor financial advice.
Several respondents likened contingent charging to commission.
Supporters of the ban drew parallels with other professions, such as solicitors and surveyors, where advice for and against a course of action results in a fee being paid.
They considered that advice to stay in a scheme should be seen as equally valuable to advice to transfer.
Further analysis needed
The regulator concluded that it needs to carry out further analysis.
The FCA said it is “clear that any further changes to our rules on charging may have wider implications for the advice market and for consumers, for instance on the supply of advice”.
Taking into account the feedback to its ‘Improving the quality of pension transfer advice’ consultation, if the FCA considers that it is appropriate, “we will consult further on any new proposals in the first half of 2019”.
So far, the response from industry has supported the FCA’s decision to not impose a ban.
Steve Cameron, pensions director at Aegon, commented: “We welcome the detailed FCA thinking on the pros and cons of contingent charging for DB transfer advice.
“It has not concluded it needs banned and the key will be allowing advisers to offer their clients a range of payment approaches to meet their mutual needs.
“Heightened scrutiny from the FCA and compliance teams, coupled with an extended pension transfer specialist role should further reduce the chance of conflicts of interest biasing advice towards transferring,” he said.
Cameron’s comments were echoed by Tom Selby, senior analyst at AJ Bell. “On contingent charging – arguably the most controversial area of DB transfer advice – the FCA is right to focus on outcomes rather than rhetoric.”