Intrinsic chief: Why I support contingent charging

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.

FCA urged not to ban contingent charging by own advisers

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.

Pimfa urges FCA against contingent charging ban

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.

Nick Bamford: Contingent charging scares off clients

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

 

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. Let’s look at this from a more pragmatic analysis
    We need to be able to offer low cost credit to cover triage fees and advice fees lenders do exist time some stepped forward or if they have another dc plan with a provider can they pay from there – not just now but HMT needs to push HM
    RC on this point

  2. The removal of contingent charging will not resolve poor outcomes. This is how Active Wealth and its £1000 fee to transfer gained traction with British Steel members in Port Talbot, thinking they were getting a cheaper deal than going to the honest advisers.

    The issue is that the client cannot act themselves. They have to gain an advisers signature to transfer and the adviser HAS to carry the liability. Many pension trustees now require a supported adviser agreement to transfer. Those trustees that do not are becoming few and far between. PI insurance have removed insistent client cover for DB Transfers and the premiums and access unsustainable.

    The issues are very complex, but the main challenge is that MP’s and regulators have sort to give the consumers freedoms, but have made advisers accountable with conflicting guidance and rules. What is acceptable to the FCA in many cases in not to the FCA. How can you call it Pension Freedoms when the consumers are held at gun point to gain an advisers agreement. Many advisers have pulled advice in this area due to increased PI and uncertainty of being able to defend future ambulance chasing claims.

    There is a solution which many would find unacceptable, give the client the option to conduct the transfer themselves. Madness I hear many cry. Fraudsters will always find a way to release consumers of their hard earned savings. Advisers should not have to carry all the burden of liability. Consumers should have the right to conduct their own affairs with their own pensions. The sensible will seek advice and help. The rest will be execution only transactions with the liability firmly on the consumers.

    Few advisers yet have woken up to the fact that if they charge a fee and decline to transfer they are as likely to face a claim in the future as if they had supported. The fee and advice means that what ever outcome does not suit or disadvantages the client or their family, they will see a lawyer chasing behind offering redress on a no win no fee bases.

    Give the consumer the ability to transfer themselves and take full responsibility or provide advisers with a clear processes, regulatory statements, agreements and ban unregulated investments other than single property commercial property purchase for business owners. That if implemented correctly will offer some security to advisers. The current system is madness and will see advisers either go out of business or refuse to advise.

  3. Seems nobody ever asks the clients. I always offer a fee or product charge to a client and apart from the odd occasion they all prefer the contingent charging route.

    About time the FCA and other agenda-driven organisations took note of the publics view and stopped trying to impose their new world order on others.

    • Julian Stevens 1st June 2018 at 10:26 am

      On what basis do you assume that nobody ever asks clients how they want to pay for advice that’s as free from any conflict of interest as is practically possible?

      If could well be argued that advice on whether or not to transfer DPB’s is more complex, nuanced and risky than just about any other. Also, the adviser giving it is subject to the same potential liability for a recommendation not to transfer as s/he is for a recommendation to proceed (though the prospect of a complaint about the former is, admittedly, considerably less than one about the latter).

      Like me, you don’t advise in this area but, if you did, I imagine you might well decide that, in view of the amount of work involved (to do so properly), providing it on a contingent charging basis is simply not commercially viable. Therefore, you would have to charge an upfront fee.

  4. How can advising someone to retain their DB pension be perceived as a negative outcome? I think this says more about the advisers motivation than what is in the consumers best interest,

    Given the work involved,contingent charging simply results in a cross subsidy from those who transfer to those who do not, increasing the transfer risk for them in the process.

    It also heightens the risk of further subsidy from firms with non contingent models picking up the FSCS bill of firms which fail due to offering complex advice pro bono.

    The answer to the advice gap is to use the efficiencies of technology to support human interaction, thereby cutting the cost of advice for all and each client paying a fair fee for impartial advice. It can be done and provides a better long term solution than the “ no transfer no fee”model

  5. No advice means consumers no worse off than they currently are because they can’t transfer their DB pensions.

    I can think of 100+ British Steel workers who would likely gladly turn the clock back to that point.

  6. David Bennett 1st June 2018 at 9:50 am

    IMO, Contingent Charging encourages Advisers to recommend transfer.

    If they subquently shut up shop, the cost falls on FSCS.

  7. James Hurdman 1st June 2018 at 1:44 pm

    So essentially we have the head of a large Network acknowledging that the “complicated nature of this area of advice means the fees can be substantial”, but then suggesting that advisers should undertake the process with the prospect of not being paid. What kind of business strategy is that?

    Why do so many people in this profession not attach value to their time and expertise?

    • Julian Stevens 6th June 2018 at 5:53 pm

      Point A ~ Agree totally.

      Point B ~ Well, most do (I think), but many fear that (prospective) clients will refuse to pay a fee for advice that may not lead to the sale of a product. Other clients assume that the sale of some sort of product is all but inevitable and that the adviser will be paid for his time out of that.

      It’s nice to be in a position where you can turn such people away, but many (still) aren’t.

  8. Christopher Lee 1st June 2018 at 2:21 pm

    I am a PTS that charges for the financial planning element of just about everything I do. A DB analysis just happens to carry a higher fee for the higher level of work involved. I earn a large proportion of my fees from providing advice on existing provision, which may be, “leave everything as it is”. I have never had anyone refuse to pay. If there is advice to transfer (i.e. consolidation or more appropriate provider) then I may partially offset or waive the financial planning fee. Regarding DB transfers specifically I labour the point that they may end up owing me a fee (+VAT) for an outcome that they did not want (or think they want). If they do not wish to accept my terms then I am not the adviser for them. If they are looking for an ‘order taker’ then unfortunately there are still plenty out there. I think the solution may lay with making sure the PTS is the only adviser giving advice (i.e. all the advice) not the various proxy/third party solutions that appear to exist

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