A ban would worsen customer outcomes in most cases
The report earlier this year from the work and pensions select committee on British Steel Pension Schemes is not ambiguous when it comes to contingent charging. It wants a ban. The report offered several examples of poor behaviour, which have no place in our modern profession and only serve to taint the public’s trust in financial advice.
The subsequent FCA consultation paper on the subject read like the writing is on the wall for contingent charging and a ban is imminent. However, it has offered the sector a welcome opportunity to pause, debate and offer views on the impact of such a decision.
Along with digesting the industry’s response to the consultation, the regulator should also take a close look at past instances of unsuitable transfer advice to determine the links between them. This investigation may reveal that contingent charging is not the main issue.
In fact, the consultation acknowledges “the causal link between contingent charging and unsuitable advice is not clear-cut. It is generally hard to show that unsuitable advice is due to firms using contingent charging models”.
I agree and believe a ban would, in many cases, worsen customer outcomes.
We have seen several examples of people on modest incomes with large transfer values. Recently, one of our advisers had a client earning £40,000 a year to sustain him and his wife. Over the course of his life he has built up a very healthy defined benefit pension pot of over £1m. Now, he is seeking advice on whether to transfer his pension.
The complicated nature of this area of advice means the fees can be substantial. If the advice is to transfer, then he will be able to use his pension to pay for the fees. If it is not, he is left with a sizeable bill and may feel like it was a waste of money. In many cases, the customer will not take the advice in the first place.
This is a deeply negative outcome and it is not something that will happen to just a handful of people. In most instances, when it comes to a final salary transfer, the advice is not to transfer. You can argue that advice not to proceed is sound advice but, in reality, very few people will want to pay significant fees to be informed of what was already the likely conclusion.
We know from the Financial Advice Market Review that most people are unwilling to pay for advice and, therefore, I fear an outright ban would push consumers towards cheaper advice or increase the advice gap altogether.
So what can be done?
In its purest sense, contingent charging means an adviser will only get paid if the advice is a recommendation to transfer. Given we already know that, in most cases, the advice to proceed with a transfer is unlikely to be the right advice, there is a conflict of interest that needs to be managed.
This is best achieved by separating the giving of the advice and the decision to proceed. Some firms already implement a process that requires multiple approvals before a transfer is processed. So not only will a pension transfer specialist need to give the advice, that advice will have to be checked by another specialist. This process gives the client confidence the advice they are receiving is impartial and in their best interest.
The separation of the advice and the transfer decision, along with the changes being made through PS18/6 to drive up the quality of advice, can serve to address the issue of unsuitable DB transfer advice without a contingent charging ban.
This gives the advice sector the best chance of continuing to meet demand and help people reach the right outcomes in what are often life-changing decisions.
Andy Thompson is chief executive of Intrinsic