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Contingent charging is the root of all evil

Tapper-Henry-First Actuarial-2013
Henry Tapper

First Actuarial business development director Henry Tapper claims “contingent charging is the root of all pension transfer evil”.

In a panel debate on DB Transfers: A 2020 View at Money Marketing Interactive today, speakers argued over the degree to which different IFA charging structures constitute a conflict of interest.

Lane Clark & Peacock actuary and senior consultant Damian Bailey put forward the view that even levying ongoing charges on a client’s portfolio creates a potential conflict as these earnings “are not insignificant”.

He says: “When you add up the annual management charges that are layered on top of fund charges and you think that they could apply for the next 15 or 20 years you are not looking at a 3 per cent charge of a member’s fund you are potentially looking at over 10 -15 per cent, so it is a big issue and yes there is a conflict.

“That is why when we sit down with trustees and take them through what the charging structure is of the IFAs we will be asking them.

“It is not for us to say don’t do it, it is just for us to point out that it is there.”

While Tapper says he is not against IFAs charging for ongoing management of funds post transfer, he is wholly opposed to advisers making an upfront charge from the client’s fund which is contingent on a transfer taking place.

He says: “All the people I know who are sensible serious people do not like contingent charging.

“I’m against contingent charging because it is all too easy for vulnerable customers to end up in the wrong position in a frictionless environment.

“Contingent charges are the root of all pension transfer evil.”

Intelligent Pensions technical director Fiona Tait argues against Bailey’s implication that ongoing portfolio charges post pension transfer constitute a form of contingent charging.

She says: “I don’t think there is necessarily a conflict of interest. The way that we work is it should be remuneration for work done so we do get ongoing service charges for managing the clients’ portfolios going forwards.

“It can be argued that Ok it is contingent because you wouldn’t get that if the client didn’t go ahead with the transfer, but we would say that we are getting it because of the work that we are doing.”

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Comments

There are 20 comments at the moment, we would love to hear your opinion too.

  1. I see they have completely ignored the point that more than a few clients are unable or unwilling to pay a charge directly.

    Which is why we charge a fixed pre-agreed fee for the transfer advice, which does vary dependant on the size of the CETV, complexity and risk, as well as a separate implementation fee.

    One could try to argue that the implementation fee is “contingent”, however to take something and throw it back at Henry Tapper, let me ask this question.

    If you totally ban any charge based on whether the client does something or not, then you create a different conflict of interest, which is their becomes a bias towards retain, because why would an adviser want to do work that they aren’t going to get paid for?

    This is why we have chosen to do it the way we do, it’s fair, it weeds out most of any potential bias, whilst allowing us to be paid a fair amount for doing work when we do it.

    However even in our way, we have on more than one occasion ended up with a client who agreed to pay the review fee, then is struggling to find a way to pay it, because the recommendation was to retain his DB scheme and he had little in the way of accessible funds.

    • Trevor Harrington 4th April 2019 at 3:39 pm

      Come on Henry, this comment from Duncan is only common sense, surely.
      It is not the function of contingent charging which is wrong … it is the few bad Advisers who use it to gain unfairly.
      As that is the case, which patently it is, those bad Advisers will gain unfairly regardless of the method used – even hourly rate, timed or set fees are abused.

    • Julian Stevens 4th April 2019 at 6:54 pm

      As I’ve said before, anyone who either cannot or will not pay an upfront fee for impartial advice on whether or not to transfer is very probably not a suitable candidate for doing so.

      If the work involved in arriving at a recommendation not to transfer is substantially less than that required to justify a recommendation that the client is likely to be better off by transferring, you could always refund half your fee.

      • Julian,

        You have made this assertion before, as you mention in your comment.

        What I don’t recall seeing previously (and feel free to correct me if I’m wrong) is your rationale and evidence for this stance.

        Could you elucidate, please.

        • As an example, it’s generally accepted (I believe, though correct me if I’m wrong) that people whose entire (or the great majority of their) wealth and future retirement income are represented by their DB pension benefits, who have very little in the way of cash savings (from which they could afford to pay an upfront fee for advice untainted by any potential conflict of interest) and little or no experience of investments very probably shouldn’t transfer their equivalent value into the uncertain medium of a SIPP.

          By way of contrast, for someone with
          plenty of cash savings, other investments (of which they have reasonable degrees of understanding and experience) and other sources of secure income (sufficient to cover their minimum requirements), exposure to the risks of transferring MAY be appropriate (but still might not be).

          That’s my take on it anyway, with which a number of other people have agreed. But, as always, it’s just my opinion and I’m not a transfer specialist, so please feel free to disagree.

  2. Everyone is right, as there is no defined perfect charging solution, why, because its ethics that actually will dictate the final outcome.

    Place an upfront charge based on the full process and advice, suitability and many cannot afford it or more to the point, will not pay it. Human nature is what it is.

    As for the DB Transfers, they are most likely finished anyway, even if it is good advice to do.

    The increase to £350,000 maximum that can be awarded by the FOS, will see insurers most likely charging in access of £2,000 pa, per transfer going forward for the very few they will insure. Advisers cannot undertake such business as they will be bankrupt within a few years. This alone means the upfront charge to review any DB Pension, with the liability and ongoing costs will result in fees becoming unaffordable for the vast majority of consumers in the UK.

    Until the FOS has to use the rule of law, until cases can be taken to court, until there are clear RULES and PROCESS provided by the FCA and FOS, the DB Transfer Markets is dead to all but the very wealthy in the UK.

    • You can be taken to FOS if you advise a client NOT to transfer and it subsequently turns out that it would have been to transfer.

      An obvious example would be if you said “don’t do it” and your client died a few months later.

      If they had died accidentally, I think FOS would side with you but if it turned out they had died of natural causes you might have a problem and either way you would have the cost and stress of dealing with it.

      That would apply even with contingent charging where you had made no charge.

      So it might be wise to use a Chinese Wall arrangement where you contract to provide the advice and then contract again to implement any recommendation – with each component having its own fee.

      However, given that PI is on a “Claims received” basis, there is absolutely no guarantee that an insurer who says they will cover you now will actually provide cover when there is a real risk that a complaint might actually come in,

      So you could find that your expensive PI cover is actually a chocolate fireguard.

  3. I’m happy to stop contingent charging. But don’t be surprised if I increase my on-going advisor fees considerably until I recover the costs for my work and time.

    • Given that contingent charging means you don’t get paid if your recommendation is not to transfer, I don’t see why switching to non-contingent charging will increase your costs. Surely, if you get paid for your work irrespective of your recommendation, you’ll be better off?

  4. Contingent charges depends on the governance within the practice of the IFA firm. Advisers should have substantial salaries that are not driven by new business. If you have a close knit firm then with strict methods and procedures there is not a problem. When you have (usually large) organisation with sale forces that have “on target earnings” then this is when there is the need to just get new business.

    • Trevor Harrington 5th April 2019 at 9:25 am

      Perfect analogy

    • Bearing in mind the FCA’s stance that most members of DBP schemes are likely to better off staying put, how many successive recommendations, on a contingent charging basis, not to transfer would prompt your firm to question the viability of this methodology?

      Targets or no targets, no firm can support its transfer specialists spending all the time necessary to arrive at a considered recommendation not to transfer on case after case with, on a contingent charging basis, no fee income. Bear in mind also that firms are liable for the suitability of each recommendation whichever way it goes. Of course, the risk of a complaint from a client that they were mis-advised not to transfer being upheld is slight, but it could happen.

    • Trevor Harrington 5th April 2019 at 9:29 am

      Would agree except that unless we challenge this sort of outdated thinking when we see it, the FCA will take it that we, as a profession, accept the theory when it is obviously rubbish, if it was acted upon it would be very detrimental to our clients.

      This was the case with RDR because we were divided on the concept, and we fell as a result of that division in our collected thinking.

  5. Correct Martin – the DB transfer market has been killed via the backdoor by this increase to £350K.

    This conversation is now almost as boring as the Brexit debate – people pontificating their views with little or no consideration for an alternative view.

    However “All the people I know who are sensible serious people do not like contingent charging.” is possibly the most ridiculous and condescending comment/argument I have heard yet

  6. Mr Tapper’s comment that contingent charging is “the root of all evil” is not only grandstanding of the worst sort, it also fails to recognise that there was good practice being followed and good advice being given – even in the British Steel arena – by advisers working on a contingent basis.

    I’m not allowed (by FCA) to name my employer but I can confirm that we had a significant number of British Steel files checked by FCA as part of their discovery work and received an absolutely clean bill of health on every single file.

    We’ve also had DB transfer files checked – both at our demand and cost and at the request of PI insurers – by highly-rated external bodies and have received clean reports on each occasion.

    Contingent charging is not – in and of itself – demonstrably evil. If you have a team of highly-qualified, well-paid and professional compliance staff checking the advice before it is delivered, you can (and we do) weed out the poor or self-serving cases before they get to the client.

    Marry that team to a management that is entirely focused on the best interests of clients rather than feathering the corporate nest and you have an environment where good customer outcomes flourish.

    It’s interesting that almost all of the firms who ripped off clients were small-ish, directly authorised IFAs who were the direct responsibility of the FCA.

    Perhaps Mr Tapper should direct his ire at those who are actually responsible for the problems rather than tarring all PTSs who charge contingently with the same brush.

    • Julian Stevens 5th April 2019 at 7:14 pm

      That’s fine, but how many other firms don’t adhere to anything like the same high standards as yours? It’s those about which the FCA is rightly concerned. And surely you have to factor into your contingent charges the costs incurred on all your recommendations not to transfer?

  7. I’d like to suggest to Henry Tapper that arrogant, well off, know it alls might be the root of all evil.

  8. I seem to remember it was actuaries who designed and enabled all those wonderfully good value products flogged by insurers in the ’80’s and 90’s.

    A little humility can go a long way…

  9. “I’m not allowed (by FCA) to name my employer”

    Took me less than two minutes to find out!

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