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Nic Cicutti: Time for advisers to get rid of contingent charging

The advice industry must grow out of old habits and move on from these worrying arrangements

I will always remember the day I got my first bicycle. I was four years old, still in short trousers and my dad led me out into the courtyard of our block of flats to show me my birthday present.

The bike was bright red, with a large chrome ding-a-ling bell and fat white plastic hand grips.

It also had two small stabilisers just off the back wheel, but my dad said that once I became good enough at riding I would be able to use it with just two wheels, like the bigger kids in our neighbourhood.

Did you know that stabilisers are no longer considered to be a good way of learning to ride a bike? A parent of a young lad just about to embark on his own two-wheeled adventures told me recently that, because they hold the bike in a rigid upright position, they apparently prevent a rider from learning how to lean naturally. This means when they do eventually come off, a child must effectively relearn how to ride a bike all over again.

Thin red lines: FCA fires final shots on DB pension transfers

I was reminded about stabilisers the other week, after reading about the FCA abandoning plans to introduce a ban on contingent charging for defined benefit transfer advice, preferring instead to raise qualification levels for advisers engaged in this area of activity.

The decision comes despite criticism of the practice by MPs on the work and pensions committee, in a report on pension transfer mis-selling in respect of the British Steel Pension Scheme.

The report said advisers were “incentivised to push transfers”, as clients would only be charged if they agreed to complete.

It may seem hard to remember now but 15 or more years ago, contingent charging was the stabiliser option for IFAs who faced being hammered by the FSA’s proposal in 2002, set out in CP121, that firms wishing to retain their independent status would have to charge fees. This was the direct payment system.

IFAs could, if they wished, waive a fee for their services and accept commission instead. But they would only be able to do so after having given the advice. In effect, IFAs would have had to agree an hourly tariff with clients in advance.

If the advice was accepted and clients bought a product, the IFA could agree with them that the fee would be paid out of commission. The remainder would have been handed back to the client as a rebate.

Unsurprisingly, most IFAs saw this alternative option as a dog’s dinner – which is where former Lloyds chief executive and Northern Rock executive chairman Ron Sandler came to the rescue.

Sandler was commissioned by then-chancellor Gordon Brown to conduct a review of Britain’s long-term savings industry. His report is chiefly remembered for his unpopular (to the industry at least) proposals for a suite of simple, low-cost savings products, which would be easier to regulate.

Keith Richards: Contingent charging must be preserved 

But what Sandler also did was recommend a middle way between CP121 and the previous system, whereby IFAs could describe themselves as independent while still being remunerated by commissions. He suggested advisers should present a “tariff sheet” to clients, with charges for various services and/or transactions.

Any fee could be made contingent on a sale, though it needn’t be. Sandler argued that his “no sale, no fee” model would allow IFAs to retain their status, because it did not force them to charge if the punter did not make use of their services.

His proposals in 2002 led to the menu system – a stitch-up between Aifa, IFA Promotion, life offices and the FSA – whereby advisers would have to tell clients what their charges were for a typical transaction and how this compared with industry averages before advice was given.

The menu system, which legitimised contingent charging, largely kept the IFA sector intact for a decade or longer.

At the same time, journalists like myself pointed out that it was fundamentally a stop-gap solution.

I wrote at the time: “IFAs appear to have won a reprieve. The challenge is what they do with it. It is not enough to … carry on as before. The debate over DPS and alternatives to it must now be used as the start of a process that takes IFAs from a disparate group of essentially semi-skilled salespeople to true professionals.”

The intervening years show that this debate has never really gone away. Increasing numbers of advisers understand that remuneration arrangements where the adviser gets paid much more if the client transfers than if they do not has “conflict of interest” written all over it.

The problem is that many others are unable to let go. They tell themselves that without contingent charging, many of their clients would not be willing to transact.

Contingent charging has become the stabiliser that advisers never want to take off their bikes for fear of falling over. Yet what it also does is teach the wrong riding approach.

Advisers could do so much better if only they were prepared to drop those two little wheels at the back of their bikes.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

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

  1. Christopher Petrie 18th October 2018 at 12:38 pm

    Most IFAs don’t advise on pension transfers.

    I’m qualified to do so but avoid them like the plague.

    I doubt this article has much relevance to its readership.

  2. Agree. Another good article Nic.

  3. Nic, whilst I fundamentally agree that in many cases contingent charging is a bad idea. It is also very clear why the FCA did not ban it relating to pension transfer advice.

    So are you advocating that some people should not be allowed good quality advice, simply because they cannot afford to pay a large direct fee, where they can pay that fee from something such as a pension fund?

    Would it not be better to be advocating a solution to the issue relating to DB pensions, to require all scheme providers to be able to deduct an agreed fee and have the “scheme” pay, like for example AA scheme pays charges?

    The structure is already there, all it requires is a little expansion in the definitions of what it can be required to pay for..

    • I remain of the view that those who either cannot or will not pay an up front fee for advice on whether or not to transfer their DB pension entitlement/s probably aren’t suitable candidates for transferring.

      • So your advocating that those that cannot pay directly shouldn’t be allowed to have advice, despite the fact that they may need it.

        I love the “probably aren’t suitable candidates for transferring” insert as well. So just slap a universal catch all statement to try and justify your argument when it simply doesn’t hold water.

        I’m curious Julian, do you take all those pre-conceptions of yours into the advice you give?

        Do you even give advice about Safeguarded benefit transfers?

  4. Back to the old rubbish Nic. Money Marketing might just as well republish your old articles and save themselves a bit on money.

  5. The trouble with writers is that they are always requiring an advance and being paid for books that they are writing!

  6. We’re not in the DB transfer market at all but we don’t do contingent charging on general investment and/or pension business. If a client wants a report and recs they sign up to a basic advice fee. No CAD, no fee. Working on spec is a mug’s game.

  7. Nic, I think you are probably right overall. Two things to consider though.

    Firstly, if the adviser is honest it probably works for clients who would otherwise not get or seek advice. Banning something because a parts of it doesn’t work isn’t necessarily a good solution. You don’t ban cars because someone crashed.

    Secondly, a ban on contingent charging would almost certainly see a reduction in the advice available. Given advice is mandatory in many cases that would have resulted in increased prices (supply and demand) and quite possibly non availability of advice at all. That would be a massive stab in the back for pension freedoms and politicians would look to the FCA for answers as to why their great idea was being restricted. Much easier to dodge that one and maintain the situation where if anything goes wrong (and it will) you have someone else to blame. The FCA are pretty smart when it comes to political expediency.

  8. Duncan Gafney is spot on. DB tsfer sdvice is always going to be relatively expensive and clients won’t always want to commit non pension monies to pay for it, which under the current system they have to if advice is to stay put. But if the client has the right to have the fee for the advice paid by the scheme itself the whole “problem” goes away. Maybe with a cap, maybe even limited to once every 5 yrs and/or within 10 yrs of age 55, whatever… but it really is such a blindingly obvious solution that works for CLIENTS that I just don’t get why it’s not already in place.

  9. So the Nic, how exactly are you going to police this ban on contingent charging or indeed ask advisers nicely to stop ?

    To my mind its like the commission ban, all that’s really happened since RDR is its been renamed to fee.

    Or is it that people are still trying to find a direct link to how we remunerate ourselves to bad advice ?

    Bad advice is bad advice, a scam is a scam, irrespective of how the fee is taken, percentage, hourly rate, fixed price, or bangers “N” mash ?

    If you intend to ban any payment to an adviser from the investment itself, well ? I think you will exclude a very large proportion on society from any kind of financial advice at all !

    Bit of a lazy article in my view, on a subject flogged to death.

    Picked the wrong drum from you kit to bang today Nic

    • Yes, contingent charging is indeed nothing more, really, than commission by another name, with a bit more flexibility as to the level at which it’s pitched, both initially and ongoing.

      If advice is to be unsullied by any conflict of interest it should, as far as is practically possible, be separated from the implementation of a product.

      Whilst perfection, in any walk of life, can never be achieved, it seems (to me anyway) odd that the FCA has shied away from implementing any measures whatsoever at least to minimise potential conflicts of interest, particularly in an area so fraught with potentially damaging consequences and on such a large scale as DB pensions.

  10. My firm doesn’t use contingent charging but I thought this was noteworthy

    David Geale of FCA is quoted as saying

    “the regulator has not found a ‘causal link’ between contingent charging and unsuitable advice.

    ‘If we saw a causal link that would be one indicator of rethinking contingent charging,’ he said.

    Isn’t that similar to what they said pre-RDR about commission?

    • You are correct Nick, though that was in reality based on what they thought rather than any actual evidence (to be fair they did cite an Australian study but that drew no firm conclusions and was based on a very limited, less than 20 cases, study).

      As we all know, in 2002 the FSA commissioned Charles River Associates to undertake an in depth survey which assessed the incidence and level of commission bias. The report stated:

      “The advice market is not riddled with bias”.

      “There is no detectable bias on regular premium products”.

      “There is no evidence of any provider bias in either the Stakeholder pension or the non-Stakeholder personal pension recommendations”.

      “Despite anecdotal evidence that some IFAs and IFA networks do take advantage of their position to recommend product that yield them the greatest commission, there is little sign that this is happening on a large scale”.

      The report then explained why commission exists and why it is beneficial in stimulating the sale of product solutions to consumers:

      “The level of commission can be seen as a margin that providers pay to intermediaries for distributing their products. On the face of it, providers have to pay this margin out of their total costs, and one would expect to find that levels of charges and commissions paid by different providers are strongly correlated. If this is the case, then higher commissions would be associated with consumer detriment. We know of no quantitative research demonstrating this to be the case, however.”

      “The role of commission in stimulating the sale of savings products may be socially beneficial in the current UK situation, because many customers and potential customers are thought to make insufficient savings”

      Charles River Associates was subsequently asked by the Association of British Insurers (ABI) to undertake research into adviser remuneration. The report, published in February 2005, made the following observations:

      “No evidence of bias being prevalent across the advice market.”

      “No evidence of bias to over-sell.”

      “No evidence of provider bias on regular premium products.”

      The results matched the conclusions from the earlier research. Charles River Associates commented on the viewpoint that commission is deleterious:

      “We therefore conclude that the problems of perception are greater than the reality”.

      Who needs evidence when you have your own ideas, beliefs and political agenda… Nic?

  11. Agree with Nick.

    In the end it is for us, the profession to get rid of contigency charging.

    I did contigency charging at the end lf my career, and I was frustrated to work with people not able to commit, who expected all my research work to be done for free.

    Moving to non-contingent charging accross the board with fixed annual fees, made our life a lot simpler. We charge the client an annual fee either way, we do not need to switch products around etc. Even switching comparisons are a lot simpler.

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