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Solving the contingent-charging conundrum

Calculating SavingsContingent charging has come under intense scrutiny from the FCA and the question of whether or not it should be banned has divided the adviser community.

But there is also wide divergence in exactly how models work across firms, how much advisers are charging and when exactly contingent fees are levied.

There are those who argue that, alongside pension freedoms, contingent charging has been the main driver for the astronomic growth in transfers out of defined benefit schemes. First Actuarial director Henry Tapper points to Office for National Statistics data, which shows that, since 2014, before pension freedoms and an upswing in contingent charging, the amount of money being taken out of defined benefit pensions has increased six-fold from £5.4bn a year to £32.4bn in 2017.

Intrinsic chief: Why I support contingent charging

Tapper says that advisers are typically charging between 2 and 3 per cent of transfer value in up-front contingent fees. In some of the worst cases, among the British Steel Pensions Scheme members, Tapper says he has seen workers charged up to £12,000.

Tapper says: “That’s too much for an individual to write out as a cheque; they are just not going to do that.”

One IFA he spoke to says he works out his charges on an hourly rate. Carrying out a proper review and pension transfer takes around 30 hours, which at £150 an hour would be £4,500. On top of this there is a charge to cover professional indemnity costs, which have soared as a result of the recent transfer scandals, so this adds another £500, bringing the total advice cost to roughly £5,000 per transfer.

With contingent charging the fee is taken out of the client’s pension pot on completion of the transfer to the new provider. A major advantage for the client is that the charge is free from income tax as it comes directly out of their pension pot before they receive it. It is also free from VAT as it is classed as an implementation charge.

This means the client saves 20 per cent on VAT and up to 45 per cent on income tax. Advisers who go on to manage a client’s pension portfolio will then levy ongoing charges, which can also be seen as contingent on the transfer taking place. These are typically between 1 and 2 per cent, says Tapper.

Pimfa urges FCA against contingent charging ban

He says: “I think contingent pricing has been responsible for this massive jacking up of DB transfer volumes. When the FCA looked at DB transfers it found that in 53 per cent of cases there were problems. I support a ban on contingent charging on balance because I think we’ve now got to a point where transfers are happening left, right and centre, and many other people I speak to have no idea what they’re doing because they simply haven’t engaged with the advice.

“They see advisers as gatekeepers to their money, not people with whom they can have a discussion.

“I’ve spent a great deal of time down in Port Talbot with steel workers who have been bamboozled out of their hard-earned savings, and frankly I’m not minded to listen to the apologists for contingent charging, even though some of them are my good friends.”

Tapper believes that while there are disadvantages to banning contingent charging, the pros outweigh the cons. He says: “Although there are a few people who will undoubtedly not get the quality of advice they need, on balance we are better off without contingent charging. We are better off with people paying out for the advice up-front because in the majority of cases people are better off staying in DB pensions. That is the position that the FCA has reverted to.”

But Echelon Wealthcare managing director Al Rush argues that contingent pricing is less of a problem than other DB transfer issues. Rather than charging clients a percentage fee, Rush estimates how many hours a case will take based on its complexity. He says it is not fair to base the charge on the size of the pension pot as a very large pot does not necessarily require that much more work than a small one.

He says: “I have got nothing against contingent charging if it is done properly. I do not think it is the charging structure that is at fault here; I think it is the bad advisers that ruin it for everyone else.

“There are some people out there who genuinely, for whatever reason, do not have access to liquid funds. They might have just paid for a child’s wedding or a medical bill. They could be highly suited to a DB transfer and so in those circumstances contingent charging is not bad.”

FCA mulls contingent charging ban for DB transfers

Rush says he has seen cases of British Steel workers charged as much as £30,000 for transfers as well as extortionate ongoing management charges. In some instances the workers were in their 40s; Rush says they did not need ongoing advice on their pension portfolio at all but could have just left it in the new workplace scheme.

Rush advocates a two-person sign-off, with two qualified advisers or even a professional body signing off on any DB transfer. He says: “For DB transfers you can’t put toothpaste back in the tube. Once it is done it is irrevocable, so I am a firm believer that there is a higher threshold of responsibility than putting somebody into a £20-a-month life insurance policy.”

Red Circle chartered financial planner Darren Cooke agrees that contingent charging should remain. He says: “Contingent charging is not the problem; greed is the problem. I think it is about improving the standards in the profession. We have got to find a way of making sure advisers do the right thing for the client rather than for their own pocket.”

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. “I think contingent pricing has been responsible for this massive jacking up of DB transfer volumes.”

    Evidence?

    Contingent charging has been around a long time and hasn’t changed. Perhaps it’s more to do with the pension freedom changes and attendant publicity?

  2. Julian Stevens 4th June 2018 at 12:36 pm

    Isn’t “up-front contingent fees” an oxymoron?

  3. The fee can still be taken from the product before the residue is paid to the client. So as in the article £5k could be arranged with the provider, with the client agreement. I believe it is called CAR. (Client Agreed Remuneration).

  4. Agree with Grey Area – contingent charging is as old as the financial services industry/profession. We used to call it commission – but we can’t be paid commission anymore on investments/pensions. Can the author please show me how to massively increase my business by adopting contingent charging as the report seems to suggest the increase in DB transfers is directly correlated to how the adviser charges for the service. Shows a distinct lack of understanding on how the profession works whilst under the scrutiny, regulations and oppressive controls of the FCA and other so called ‘consumer’ pressure groups.

  5. Until the problem with PI Insurance is resolved this is a pointless debate.

    If you advise on and transact a DB Transfer, charge a one off fee, then the advisers have to pay £xxx per annum to insure that advice for ever, or as long as that business trades. I agree with the calculation offered of this being around £500 per annum per transfer.

    So you charge £5000, you are liable for ever as we have no legal long stop, allowing for 5/7 years without on going servicing fees, FCA and FOS levies and you have made not a single penny and are still liable. From this point on you are making a loss and when you retire, close the business the industry only becomes liable IF a compliant is upheld.

    Why would any adviser offer a one of low fee advice service for DB Transfers, you will go out of business.

    This is a total nightmare, the system is out of control and is getting worse, unmanageable and unsustainable by the minute.

  6. So consumers have to pay a lot of money to cover the costs associated with DBT because bad advisers have rendered DBT extremely expensive in terms of case checking and insurance and the PI underwriter cannot easily distinguish good firms from bad. Total nightmare indeed. It stems from the Chancellor not consulting the regulator before unleashing pension freedoms probably, if you are looking for a single most proximate cause. Banning contingent charging would at least have the effect that only people of ‘means’ generally would start raiding their final salary pensions – just an idea!

  7. Why ban something that clients want? The majority of clients are happy to pay £5000+ out of their pension pot rather than earn the money to pay the adviser as it is much more tax efficient.
    Karen Malin – I also do not see any evidence of people “raiding” their pension pots before they retire. Raiding is a very poorly chosen word in my mind.
    In my opinion the major problems seem to have been caused by unscrupulous unregistered(FCA) advisers telling people who are not financially literate they can get returns of 15%+ p.a. by investing in Nicaragua or other. They then tell friends down the pub that they have a marvellous return on their investment which perpetuates the problem.
    The answer for me is for the FCA to completely outlaw unregulated companies.

  8. Julian Stevens 5th June 2018 at 10:21 am

    Were the FCA genuinely concerned about the ills of contingent charging and if it had any real intention of doing anything about it, it would rule that the adviser charge for any particular transaction may not exceed twice that levied for the pre-sale advice.

    But that will never happen because it’s fundamentally at odds with SJP’s charging model and the FCA doesn’t have the backbone to try to force SJP to fall in line with everybody else.

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