Contingent charging is at the heart of the defined benefit transfer scandal, and the FCA must be bold enough to ban it
You may wonder why I have never sounded off in Money Marketing about commission. The answer is that, when I started this column, commission had been banned for two years. So my past rants against it, calling it the cancer at the heart of the financial services industry, were no longer needed. Or so I thought.
When I say “banned” I mean for new business on pensions and investments by regulated advisers. Advisers still got a fifth of their income from its relic, trail commission, in 2017. A total of £804.6m from charges that could not be paid now.
Commission also remains for other financial products – mortgages and, of course, insurance. Even some respectable independent advisers maximise their profits – and reduce their workload – being tied to one provider for those products.
But I am not here today to say trail should be banned (though it should) or that commission on insurance and mortgages should follow the investment ban into Room 101. No. I am here to warn that commission is back on pensions. And it should be banned. It is the cancer at the heart of the defined benefit transfer scandal and, until it goes, that scandal will continue.
Contingent charging is commission by another name. The clue is in the word – it is a payment that is only made if the client agrees to a certain action. If the client says “no” there is no payment. That is completely and utterly a conflict of interest.
I know some have written here that it is a “perceived” or “apparent” or even a “so-called” conflict of interest. Those adjectives make no difference. A conflict is a conflict. How can I, the client, know that you, the adviser, are giving the best advice for me when you only get paid if I take the course of action you recommend?
Consider this scenario. You do your due diligence and the computer churns out your 54-page suitability report. The decision between the client staying in or coming out of their DB scheme is finely balanced but just against. Do you put a gentle finger on the other scale pan and advise leaving? After all, it really is too close to call and only one recommendation gets you paid for all that work.
The conflict is clear. It is not perceived or apparent or so-called. It is there, whatever you choose to do in that situation.
The supporters of contingent charging point to those people with relatively small cash equivalent transfer values who cannot afford the fixed £2,500 fee to produce a report that in most cases would advise them not to leave.
They will go unadvised. True. But they will also not transfer, which is the best thing for the great majority of them. The few who should do it will not lose anything; they will just perhaps not be so well off as they would have been. Better that than a conflicted service where some are mis-advising thousands of people to make the wrong decision.
The answer is likely to be proposed by the FCA in its consultation response – a triage service where advisers can give advice (labelled guidance or signposting) for a low or zero fee to sort out the few clients who probably should take the CETV and are recommended to pay a fixed fee for full advice.
I have lived through – and written about – at least a dozen financial scandals, from the original pensions misselling in the late 1980s and early 1990s, which cost the industry over £13bn in redress and costs, to the industrial scale PPI fraud still paying out £400m a month and heading towards a £40bn redress bill. Not a single one of these scandals would have happened without commission.
Of course, not everyone involved was motivated by greed. But they had to earn a living and commission for quite a simple sale was one way to achieve that.
The commission-powered DB transfer gravy train keeps growing. The amount transferred doubled last year to £21bn and, despite a number of high profile quitters, the number of firms involved in doing the business rose 30 per cent (since 2015) to reach 2,895.
Contingent fees are not the only problem with the DB transfer business. Taking a percentage of a very large sum is not enough for some advisers. They also want to take a percentage of their clients’ money every year into the future – a management tax on their investments. The FCA is looking at this problem as well.
When it publishes its conclusions in the autumn I hope it has the courage not just to ban contingent charging but to end that tax too. If a client wants more advice in a year’s time, they should return to the adviser – or indeed find another – and pay a fee for it. That would focus the client’s mind on the value for money of what they were paying for. And the adviser’s on making sure they would want to return. A win win.
Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programme. You can follow him on Twitter @paullewismoney