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FCA urged not to ban contingent charging by own advisers

The FCA has been urged not to place an outright ban on contingent charging by some of its internal advisers.

Money Marketing understands members of both the FCA’s smaller business practitioner panel and wider practitioner panel – two industry groups set up to advise the regulator – have put pressure on the FCA not to completely ban the practice of contingent charging as it reviews the idea as part of its work on defined benefit pension transfers.

One panel member says the FCA “appears to have listened” to the two advisory bodies and they now rate the chances of a ban as “unlikely”.

“It’s positive we’ve had some real input into that,” the member says.

The panels were understood to be concerned about the unintended consequences of tightening contingent charging rules on the potential to access advice.

Last month, the FCA confirmed a number of rule changes for pension transfer advice, including ensuring that all transfer recommendations are personalised.

However, it also put out a number of further ideas to consultation, including if it should intervene around how advisers charge for DB transfers, given the potential for conflicts of interest if they get paid more in the event of a positive recommendation to transfer than a negative one to stay put.

The FCA said at the time that it recognises “an inherent conflict of interest when advisers use a contingent charging model”.

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. John Hutton-Attenborough 1st May 2018 at 11:29 am

    Justin. Who are these panel members and is there any likelihood that they work in an environment of contingent charging….?
    Interested to know

  2. Mr Boleyn PFS 1st May 2018 at 11:33 am

    It remains to be seen whether a ban arises. However, it is somewhat naive to suppose that a non-refundable fee for transfer advice would alter the advice given by an unscrupulous adviser. There would still be just as much incentive to then charge a supplementary or additional fee to manage the transferred monies (possibly ongoing rather than initial) if a transfer were recommended. So the unscrupulous advisers would simply amend their fee structure to pocket a guaranteed fee for advising whether or not to transfer, and then bag a smaller fee than before when they advise the client to transfer anyway. No doubt well organised but unscrupulous advisers would find a way to “lend” the fee for transfer advice to the client with the amount “owed” added on to the initial fee taken when transfer occurs. All a ban on contingent fees would do is limit the number of people requesting advice on their options. Whilst this may greatly reduce the number of inappropriate transfers, it will equally limit the number of people who might otherwise be well advised to transfer their final salary benefits. As soon as someone goes to a regulated adviser for Pension transfer advice on defined benefits there is an incentive for an unscrupulous adviser to recommend transfer. Payment methods are not the reason naughty advisers exist. It’s the exploitation of opportunities that is the bad thing, and the FCA needs to focus on policing rather than banning. Our whole regulatory system is based on creating all manner of barriers to conducting advice simply and cheaply. As a result of this complexity we now have clients who receive great advice but pay about two or three times as much as they need because advisers have to do things in a prescribed way.

    • This hits the nail on the head. Banning contingent charging will make no difference to the unscrupulous and hamper the good advisers and deny clients advice.

      Further, how would you define ‘contingent’? If you recommend a transfer then presumably you should exclude yourself from managing the proceeds because your fees on that are contingent on the advice to transfer (and potentially much greater over time)?

  3. scott gibbons 1st May 2018 at 11:36 am

    When will IFAs ever learn! If you look back at most of our darkest moments, you will find either commission or “contingent charging” at the bottom of it.

    Simple charge fees for your time and if unfortunately the person cannot afford your fees, move on.

    I am sure someone will now go on about helping the masses and access to advice for all/they work ok with contingent charging etc . . . again I will refer to my opening statement as this is what got us into trouble in the first place . . .

    • Actually, I would argue it was greed at the bottom of it. Commission and contingent charging were simply tools used by the unscrupulous. They will simply find another way unless you find them and stop them.

    • Trevor Harrington 1st May 2018 at 5:11 pm

      Scott,

      I could tell you about my myriad experiences, gleaned over the last 38 years, of rip off timed fees from Accountants, Solicitors, and of course Financial Advisers …. but it sounds likely that you have closed your mind to such things.

      I think the solution is to regulate that all Advisers must show the client an annual statement of ALL the fees and commissions that they have earned in the preceding year …. oh … I think that rule has already arrived and starts from this month.
      In which case, many Financial Advisers (the good ones) will soon find they are picking up lots of clients from the so called “fee chargers”. We shall see ….

      • Philip Castle 2nd May 2018 at 7:30 pm

        We’re doing that and having just discussed the reports we are putting in front of clients now with oen fo the WRAP providersd we use, it is quiet possibel for us (for non pension fees) to agere an inclusive fee for our advcie and the WRAP fee, i.e. as has been argued before, the chocie of WRAP is as much for the firms benefit as the advisers.
        We’re looking at how to do that now.

  4. Robert Milligan 1st May 2018 at 11:39 am

    Surly its very simple,
    1) A review Charge (Irrespective of the outcome) payable by the client or Scheme.
    2) An implementation charge, (deducted from the fund or the client direct)
    3) An on-going Review Charge (deducted from the client or fund)

    The IFA’s and only IFA’s (not Tied Agents who are remunerated on volumes of business!) should have a clear Charging agreement prior to any work being carried out. Contingent charging, on the basis that the recommendation to Stay with the DB scheme, also comes under Regulated Advice. Perhaps the DB scheme should be invoiced for the “remain” advice, under the Employer annual HMRC allowance of currently £500, looking to go to £1000.

  5. Bad advice is bad with or without contingent charging!

  6. Patrick Schan 1st May 2018 at 3:17 pm

    The FCA said at the time that it recognises “an inherent conflict of interest when advisers use a contingent charging model”.

    That’s only true among advisers that refuse to act in an ethical way. What about the advisers that ‘top up’ their hourly charges? And don’t tell me there aren’t any.

  7. Terry Mullender 1st May 2018 at 4:01 pm

    Spot on “John Adviser”.

    What the FCA also has to consider is the increased cost of PI cover for those advisers that are engaged in giving DB pension transfer advice, and the potential for ambulance chasing claims management companies to see DB transfers as the next “cash cow”.

    Costs have to be covered, & charging the client a fixed fee of 3K on a £1 million + transfer value just won’t cut it i’m afraid.

  8. Mr Boleyn PFS 1st May 2018 at 7:28 pm

    @Scott Gibbons. There is advice given in good faith and then there is advice given purely to make a profit without due regard to the needs of the client. To suppose that all fee based advice is given in good faith and that all “contingent” advice is not given in good faith is somewhat blinkered. A lot of the hours charged for when charging fees on an hourly basis is to produce suitability documents, illustrations,fancy reports and valuations, performance charts and correspondence which adds nothing at all to the quality of advice given. Regulation has led to a major increase in the documentation required to justify good advice, so much of an increase that in fact I would conclude that the regulator is a significant contributor to the unaffordability of advice. MiFid 2 is yet another example of something which is full of good intentions but the implementation of which has led to frankly stupid unrepresentative and unrealistic information being given to clients. Too many people think lazily and suppose that the current set of rules and regulations is good. It is not rotten but it is not good at all. Well intentioned yes, but not helpful any more.

  9. Julian Stevens 2nd May 2018 at 7:44 pm

    It could well be argued that advice for which payment is contingent on the sale of a product isn’t really advice at all. Rather, it’s justification for the sale.

    Given that an adviser is as responsible for a recommendation not to transfer as s/he is for a recommendation to transfer, one wonders how contingent charging in this area can possibly make commercial sense.

    And I’m not the only person to have expressed the view that anyone who’s either unable or unwilling to pay at least a reasonable fee for advice that’s scrupulously untainted by any conflict of interest very probably isn’t a suitable candidate for transferring their DPB’s.

    High quality advice in any sphere can never be cheap and those who want it have a simple choice. Pay or go without.

  10. Julian Stevens 3rd May 2018 at 9:10 am

    Shouldn’t the heading of this article be: FCA urged by own advisers not to ban contingent charging?

  11. Used the right way, it’s a tool that stops the client from having to use their savings to pay for the advice (assuming they have savings).

    Regardless of the outcome, this is the advice and this is its cost.

    But quite simply, if the advice happens to be to transfer, it can be paid for by the proceeds of the pension transfer.

    I’d like to think that (most) advisers aren’t stupid enough to ignore all the other aspects of a client’s circumstances and transfer solely because it’s easier for the client to pay them.

    If anything, it makes some clients more determined to transfer!

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