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.
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.
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 firstname.lastname@example.org