This could cost financial advice firms between £360m-£445m per annum in lost revenue. The primary driver for this is that the FCA estimates the harm of unsuitable advice on DB transfers is in the range of £1.6bn-£2bn each year.
The package of proposals is designed to “improve the quality of pension transfer advice […] and protect consumers from conflicts of interest”, the FCA said.
Contingent charges are fees clients pay only if they decide to go ahead with their adviser’s recommendations.
This means that conflicts of interest could arise as the IFA would only get paid if the customer agrees to transfer.
“The FCA’s supervisory work has revealed continued problems in the pensions transfer advice market,” said Christopher Woolard, executive director of strategy and competition at the FCA.
“By making changes to the way advisers are paid for transfer advice and the other changes to transfer advice, we want to ensure people receive suitable advice and drive down the number giving up valuable defined benefit pensions when it is not in their interests to do so.”
Advisers in the spotlight
But the regulator said there could be exceptions to the ban.
If financial advisers can demonstrate that a pension transfer is in the best interest of their client, it can go ahead.
That also applies to ongoing fees, as they can be for 20 to 30 years following the transfer. In this instance, it’s in the adviser’s duties to prove that the scheme they have recommended is more suitable than the client’s existing workplace one.
Right to choose
“The profession has always understood and acknowledged the concerns surrounding contingent charging, real or perceived, and it was right there has been additional scrutiny by the FCA as part of their review for DB transfers,” Keith Richards, chief executive of the Personal Finance Society, told International Adviser.
“Consumer choice is essential and any review to restrict that choice must be properly assessed, which at least seems to be acknowledged in this consultation statement.
“We also welcome confirmation that any potential ban will be limited to DB pension transfers only and the call for other suggestions provides for a more constructive opportunity for all firms to input.
“The wider profession has for a long time acknowledged that contingent charging is an area of potential conflict and, in such circumstances, we need to demonstrate diligence and due process of mitigation when employing.
“The additional suggestion or at least perception that advisers could also be conflicted by the longer-term earning potential of a transfer is not isolated to contingent charging and this particular aspect of the review could have even wider implications going forwards,” Richards added.
Not everyone agrees
There have been very mixed reactions to the FCA’s proposals, however.
Simon Harrington, senior policy adviser at the Personal Investment Management & Financial Advice Association (Pimfa), told IA the ban is just “wrong”.
“We have been clear throughout that the FCA needs to take into account the unintended consequences of a ban on contingent charging.
“Whilst we still believe proposals for a ban are wrong, we are pleased to see that the FCA has taken steps to ensure individuals can get some support through a more robust triage process whilst also allowing individuals with certain characteristics who would benefit from a transfer to continue using this facility.”
That is something Aegon’s pensions director, Steven Cameron, agreed with, saying that banning contingent charges would just widen the advice gap.
A bit too late?
Tom Selby, senior analyst at AJ Bell, believes that the proposals stem from the FCA being uncomfortable with the number of pension transfers taking place and the quality of advice surrounding them.
“The argument over contingent charging has always been a balancing act; with the FCA weighing up the dangers posed by the inherent conflict of interest created by the charging method, with the potential impact a ban could have on people’s ability to access good quality advice.
“In particular, by banning contingent charging, the regulator will make it more difficult for those with large pensions but on lower incomes to pay for advice.
“There remain perfectly legitimate reasons for a member to wish to transfer from a DB to a DC scheme, and it is positive the FCA has looked to address those who are particularly vulnerable through a carve-out from the transfer ban. The extent to which this carve-out will actually be utilised will likely depend in part on how onerous the process is.
“Ironically, the FCA’s most significant intervention in the DB transfer advice market comes as the number of people transferring out begins to fall.”
While the FCA’s aim is to protect clients, banning contingent charges will likely increase the cost of advice, and Steve Webb, director of policy at Royal London, believes that it is now the time to come up with alternatives to keep it affordable.
“If the FCA does not have the power to enable people to claim advice costs out of their DB pension rights, then the government needs to legislate to make this a right.
“Consumers should also have a right to a partial DB transfer to reduce the all-or-nothing nature of too many transfers.
“Until now, FCA actions have reduced the supply of DB transfer advice and raised the cost, driving some high-quality advisers with unblemished records out of the market altogether.
“This has to change.”
The FCA’s consultation is open until 30 October 2019.