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Keith Richards: Contingent charging must be preserved 

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.

Intrinsic chief: Why I support contingent charging

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.

FCA urged not to ban contingent charging by own advisers

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

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Contingent charging works fine with positive recommendations, everybody gets what they want and if the adviser can judge at outset that there is a case for transfer it is a useful payment option, at a time when the client may not have funds available to pay fees.

    As a self employed PTS amongst other things, I need to be sure that I will be paid for my time,so I insist that the firm will pay me regardless, whether the client pays them or not. This should focus the mind and ensures that a proper discussion about fees takes place before work commences, rather than hope it may go ahead in order to get paid.

  2. Julian Stevens 12th July 2018 at 4:47 pm

    Most people who either cannot or will not pay a fee for unconflicted advice on whether they should or shouldn’t transfer their DPB’s almost certainly shouldn’t.

  3. Christopher Pitt 13th July 2018 at 9:20 am

    Sometimes there is a need to not only do the right thing but to be seen to do the right thing.Of course there may be a few specific circumstances where contingent charging does not result in a conflict of interests but the benefits to be gained from these are far outweighed by the greater good of creating clarity and trust in the adviser profession. Clients should pay advisers for their advice, whatever that may be, rather than only pay if they are advised to invest / transfer, etc.

    And, who funds the advisers time / effort for those clients that are advised not (or decide not) to invest? There is a hidden cross-charge to those that do invest. This also seems wrong.

    • I disagree with almost everything you have said.

      Many people do not trust solicitors, who charge by the hour. I have, personally. seen outrageous abuse of this. There is no reason advisers cannot ‘top up’ the hours they work on a case or switch funds when there is little need etc etc etc. Where is the greater clarity proven? Nonsense.

      If I don’t want to charge a customer or prospect for a bit of guidance or advice I won’t (which is most often the case. They don’t complain and often come back at a later date to do some business. This rubbish about cross subsidies is all semantics. I don’t charge other clients any more than is shown on my client agreement because another clients has had some free advice. the whole world uses’cross subsidies in all types of business. If I don’t buy a car from a showroom I don’t pay the adviser the explaining the benefits of the vehicle, and please don’t point out a derogatory comparison to a car salesman, as I’m sure many people would like to, as a defense. I know you want to. There are countless other examples of ‘cross subsidy’.

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