The work and pensions select committee is calling for a ban on contingent charging, but this would have an impact on consumer choice.
We need to protect consumer choice by mitigating growing concerns over conflicts of interest – real or perceived – and the inherent risk to contingent charging more widely.
Consumers seek financial planning when they recognise the need for expert support. Often the need to do something is evident from the outset, meaning that the use of contingent fee charging is an appealing and convenient option for the consumer.
The increasing scrutiny of defined benefit transfers and the British Steel pension scheme fiasco, however, has thrust several important issues under the spotlight and prompted the Work and Pensions Select Committee to call for a ban on contingent charging.
The committee clearly sees removing an inevitable conflict of interest as necessary, albeit based on a minority of advisers seemingly putting their own commercial interests above that of the client – especially as the committee support the starting position that a transfer will not be in most consumers’ best interests. Logically, therefore, it doesn’t accept that an advice fee for the initial review and recommendation can be dependent on a transfer being the outcome.
The separation of an initial review/recommendation fee from any dependency to transact is a clear way of demonstrating the recognition of the potential conflict and a process to mitigate, as well as setting client expectations that a transfer may not be a suitable recommendation. If the recommendation is to proceed, however, contingent charging can of course be offered as an option, as this is more often preferred and most convenient for clients.
DB transfers will remain an area of regulatory and media focus, so it is essential that the profession acknowledges and takes voluntary control of the unintended consequences of pension freedoms, negating the need for more draconian regulatory rules potentially impacting wider consumer choice.
Professional Indemnity Insurers are alert to the issue, and ambulance chasers have the blue lights on, so we need to take control.
Conflicts of interest will always exist. That is why it’s important to demonstrate our acknowledgement and mitigation of the conflict to ensure that we preserve appropriate client options for fee charging.
Under such circumstances, we also have the opportunity to demonstrate that professional advice itself has evolved to be the product.
Keith Richards is chief executive of the Personal Finance Society