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Editor’s note: Contingent charging has flown under the radar too long

When MPs on the work and pensions select committee launched a probe into contingent charging last month, they were well aware its inquiry would split the financial planning community.

Frank Field and his team want the practice banned, despite the fact half of advisers are estimated to conduct defined benefit transfers on that basis.

Responses to the consultation have now closed and show what a thorny issue contingent charges have become. Leafing through a few of the submissions, it strikes me as a huge oversight that the FCA doesn’t have better data on this, and that we have to rely on estimates from private companies.

Cover story: Has time run out for contingent charging?

We know the regulator found that 29 per cent of DB transfers were unsuitable in its latest review of the market. It should know how many of these were done on a contingent-charging basis.

For those where the transfer was unsuitable due to shoehorning into in-house funds, it should know what proportion of these transfers were charged on a contingent basis.

Only armed with this information can we make an iron-clad case for banning contingent charging or letting it slide.

Targeted intervention on vertically integrated firms with pattern behaviours would do more to ensure suitability than market-wide surveys of every adviser with DB transfer permissions.

I can’t help thinking that given the FCA’s overall approach on contingent charges is that advisers should be wary of the conflicts they could cause, this is one instance where a template disclosure of some sort might actually help – something along the lines of “just to let you know, this could be great advice, but I am going to get paid more if you take this recommendation than a different one”.

That would be honest and transparent for consumers who are still rightly worried that, particularly when it comes to DB transfers, they aren’t in a position to judge their adviser’s integrity.

The main reason contingent charging advocates remain wedded to the model is access to advice. Scores of consumers who could benefit from a DB transfer will be instantly put off when asked to fork out thousands in fixed or hourly fees, with even greater numbers turned off advice for life by paying, only to be told to stay put.

But I think that if you can’t afford a few grand up front, you’re highly unlikely to be a suitable DB transfer candidate anyway. Do you really have the capacity for loss? Would you likely have other assets to fall back on?

More importantly, is it not the true hallmark of a profession that it is remunerated for its skill and expertise regardless of outcome?

It’s why British doctors are far more respected than their American peers, for example.

Instead of balking at Field’s probe, advisers should be taking a look at their own practices to ensure they really are clear of his critique.

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. To those looking in from outside, this looks so simple. It is important to differentiate between contingent charging and transnational fees,and this is where the danger lies.

    By all means require and put in place a flat fee for initial advice. Put very simply the cost to review any DB Pension Transfer request is the same. Its the same work, the same process. The issue will be that the cost for the vast majority will not be affordable, will not be able to be paid upfront.

    The current cost for PI Insurance per DB Transfer advised case is £375 plus VAT, per annum, every year, until the adviser retires, goes out of business or drops dead. The PI Insurers are asking more questions about cases not advised to move, which indicates they to are concerned about claims in the future in this area also.

    So, what would you charge for the initial advice, £1,500, £2,500, £5000. This is very simple, at £1,500 you don’t get paid, take the costs of research engines, PI, staff your time, it costs you money to give the advice, at £5,000 you are likely to be making a loss within 4 to 5 years,paying the PI every year for that advice, unless the client receives on going service and covers the cost of PI.

    The fact is, just like most of the Financial Advice market, regulation, uncertainty, no clear rules, FOS outcomes, no long stop, the ill thought threw requirements, trying to protect all in every situation is not working. The lower end of the market is being priced out from gaining advice, as the cost is become unsustainable and the uncertainty unmanageable.

  2. I would hazard a guess that 90+% of the unsuitable transfers will have been done on a contingent charging basis. I would bet my home that 100% of the transfers conducted by firms who then folded with claims falling on the FSCS were conducted on a contingent charging basis (token non-contingent charges of tuppence ha’penny don’t count). If the FCA actually publish some facts and I am wrong, I will be happy to be corrected.

    I would also be interested to know how much of the sub-standard advice is being given by small, directly regulated businesses with no quality compliance oversight.

    I also think that there is a very real issue around two other factors that are intertwined; client communication and advisers valuing their time. If anyone takes a look at the PFS practical guide it is clear to see that good advice in this area takes time and expertise. Prospective clients seeking advice in this area need to be told this in no uncertain terms, and advisers need to recognise that their time and expertise has a very real value to clients, and should therefore come at a cost to the client, irrespective of whether a transfer subsequently takes place.

    Why advice firms give advice on DB transfers without a non-contingent charge continues to baffle me, and if access to advice is as important as the Government professes, why doesn’t the Government start an equivalent of Legal Aid?

    As for professionalism and trust, can you imagine a scenario where Surveyors were only paid if the results of their surveys said that a property was of a minimum standard? How much would you trust the Surveyor if that was the case? And why, as a consumer, would you want to employ the services of someone that works like that?

  3. The key observation in this article, which echoes my own opinion, is that anyone who can’t afford [or who is unwilling to pay] a realistic fee, upfront, for thorough and impartial advice, untainted (as far as is practically possible) by any conflict of interest, is highly unlikely to be a suitable candidate for transferring the value of their (virtually) guaranteed DPB’s.

    The first three questions should be:-

    1. Why might you want to transfer?

    2. Are you able or willing to pay a realistic advice fee?

    3. Are you prepared to pay a fee for advice that may conclude you shouldn’t transfer?

    The answers to those three questions alone are likely to throw up many areas of discussion. I want.. or All my mates are… are not sufficient justifications.

    The next step should be a thorough assessment of the client’s CFL if the hoped-for outcome of transferring doesn’t come to pass. Are you prepared to accept the risk of ending up with a retirement income 10% or 20% lower (and possibly more) than if you’d stayed put? Could you cope with such an outcome? Do you understand the significance of the fact that transferring means saying goodbye to all guarantees? And this is all before any actual viability analysis is embarked upon.

    Claims that a ban on contingent charging would deny some people access to advice is, IMO, a red herring. No advice is better than conflicted advice and claims that most advisers manage this satisfactorily remain, at best, tenuous.

    Speculation that complaints could arise in the future in respect of a recommendation not to transfer are (again just IMO) is overdone. Building a robust case for not transferring is considerably easier and less vulnerable to later challenge than building one that they should, not least in view of the FCA’s stated position that 90% of scheme members shouldn’t. Is the position of the FOS really likely to contrary to that?

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