Contingent charging: two words that most advisers think should not go together, but often end up that way.
Since the RDR, FCA figures from the top down have been offering stern missives on the clear and present danger of recommendations being biased by charges that depend on a particular outcome.
That Money Marketing keeps stumbling across examples of the practice in the defined benefit transfer arena is sparking those fears back up again.
In a review of how firms were implementing the RDR in 2013, the FCA said contingent charging was a “higher risk” model that time-cost charging.
This, it explained, is “due to the need to sell products to generate revenue”. (Is that not the very thing the RDR was trying to remove?)
“Firms operating contingent charging should ensure they have adequate controls in place to manage this risk,” the FCA ruled.
If advisers have a financial incentive to recommend a transfer – or worse, if they only get paid if the transfer goes ahead – then this is a recipe for unsuitable advice.
But it looks like this is happening in parts of the DB transfer market.
Anecdotal reports that unregulated introducers who channel DB transfer business to advisers are receiving generous kickbacks are a common feature of the current debate.
Raymond James has an arrangement with a firm called Tideway Investment Partners, as Money Marketing reported in November, where it will outsource reports for a fee.
The most recent example, however, comes from a SimplyBiz adviser newsletter. This proudly announces the support services provider has signed a deal with Selectapension to offer an outsourced bureau to run pension transfers through.
The best part? The adviser will receive 40 per cent of the fee payable if a transfer goes ahead.
Advisers who take that money may argue it did not affect their decision to recommend a transfer, and may further claim the recomndation was suitable in the end.
But note the FCA’s standard is suitable, not most suitable. Clients could find plenty of pressing reasons why they absolutely, definitely, categorically, needed the cash right now. And it might not take too much for an adviser to document these in a compelling way that supported a DB transfer – or at least placed it among a set of plausible options.
SimplyBiz managing director Matt Timmins says: “It’s a straightforward deal. Many advisers feel that a DB transfer is best handled by a specialist, therefore outsourcing that to a specialist you would expect to receive a payment for that.
“Selectapension operate that deal across the industry, whether you are an adviser who buys services from us, are directly authorised or a network adviser you get the same deal. Its not contravening any rules, its helping the client get a better service from a specialist in a certain area of the market.”
And that’s putting aside the issue of whether the advice firms are being disingenuous in their claims they are not responsible for the recommendations.
Raymond James says: “We DO NOT give advice on the suitability of final salary transfers.”
SimplyBiz says: “The bureau takes full responsibility for the advice given.”
But the FCA has been pretty clear advisers cannot outsource their responsibilities.
It says: “The firm advising on the transfer remains responsible for the advice, including the advice checked by the pension transfer specialist, even where the pension transfer specialist is not employed by the firm.”
Time for action?
The fact remains the FCA has not imposed an outright ban on contingent charging (much like it has not put an outright ban on transacting the wishes of insistent clients, even if they go against advice.)
Frankly, inaction sits well with the FCA’s philosophy on price intervention, which is to be conspicuously gun-shy on anything that remotely resembles it telling the market what it can and cannot charge.
Provided, of course, they do keep a check on conflicts of interests that arise.
But adviser charging rules were supposed to lead to a situation where advisers were able to bill specifically for the actual advice they gave, the hours spent doing actual planning. The end recommendation was meant to fade into insignificance – at least when it came to how you got paid.
It is not that DB transfers have been given an outright pass. Far from it. The FCA has been asking both providers and IFAs questions about their transfers processes – even if it did not commit to formal work in its latest business plan this week.
But surely, for such big pieces of work, contingent charging perfectly crystallises all of the risks the regulator has been rightly flagging for years.
It is likely that plenty of advisers taking these deals will have left the industry by the time the complaints roll in.
Justin Cash is news editor at Money Marketing. Follow him on Twitter @Justin_Cash_1