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Paul Lewis: Time to end this dangerous commission in disguise

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.

Paul Lewis: Waking up to poor retirement outcomes

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.

Should the tax-free lump sum be separated from pension decisions?

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.

Paul Lewis: Investing in gold

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.

Tom Selby: What next for DB pension transfers?

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’ programmeYou can follow him on Twitter @paullewismoney

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Comments

There are 38 comments at the moment, we would love to hear your opinion too.

  1. I must admit Pauls rants would be funny, if they didn’t perfectly highlight the cancer at the heart of “financial advice” which is unqualified, unlicensed, journalists, being paid very large sums to give advice, that they protest is not advice.

    I find it ironic that Paul is constantly doing advisers down, whilst constantly demanding that they engage more, then telling people they don’t need advice, when everyone knows it’s a lack of knowledge and understanding that is most people’s issue with personal finance.

    I must admit, I find it confusing how Paul can hold so many conflicting viewpoints at the same time.

  2. The updated FCA procedures require full advice to be given whether or not a transfer is recommended, so there has to be a commitment on the part of the client to pay for that work and advice.

    So Paul is right on this occasion, those who cannot afford the fee will not get advice, same for any business, if you cannot pay you do not get the service.

    The issue of whether you are paid through the product or directly should be a separate matter, it is just a method of payment and there may be tax advantages in charging the fee to the pension plan, or charging a company for retirement planning advice for directors.

    The key is that the client has already agreed to pay the fee and there is no pressure on the adviser to favour a particular outcome.

  3. I have maintained that in order to be (and appear to be) both independent and impartial that one should not have contingent charging. Perhaps better to charge a fee for the initial advice then a second one for implementation. The “tax” on management comment is interesting as the response must be that there will be no ongoing suitability and also the clock would need to start ticking for making a complaint.

    • Yep, my thoughts exactly. Some prospective clients won’t pay a fee for advice and you have to send them on their way but, if they refuse to see why they should, then they’re probably not worth having as clients anyway.

      When it comes to contingent charging being commission in disguise, I also agree. SJP does EVERYTHING that way, right down to the bundling what the seller gets paid into the product charges. Errr, isn’t that supposed to have been consigned to history after 31.12.12?

  4. I call for grammatically incorrect, unqualified, ill-informed journalism to be banned. Once again, this charlatan opens his mouth and lets the wind blow his tongue around!

    He doesn’t agree with commission,contingent fees or ongoing service fees/ commission. Clients are offered fees options at outset and many prefer a percentage option from the product.I am sure this article is not ‘pro bono’ and I ask, what is the positive outcome of his negative ramblings in misrepresenting himself to the British public as an ‘expert’?
    If a client does not see the value in our work they will not engage, regardless of which remuneration package but whining will not help the consumer.

    There is the option to ‘shop around’ and appoint an adviser with whom the client is comfortable and happy with Terms of Business. Quite simply, the public are not daft!!

  5. Paul, I’d be pretty much on side with you. But, look at the words you use…”The few who should do it will not lose anything; they will just perhaps not be so well off as they would have been.”

    No IFA can use that as a defence against a complaint.

    Our model is a lot more complex than the average IFAs, in that we also look at DB fund counterparties (like House of Fraser for example), CETV reduction factors etc and it may end up quite possibly that, had a member been properly advised, they MIGHT (note that word) be better off out. Too late now. Equally, the wife of one guy who didn’t transfer out when he was (pre-retirement) diagnosed with weeks to live, because he didn’t have the wherewithal to pay for an adviser. Now he’s dead, as predicted, and his wife gets a DID pension of 50% of GMP worth around 1/8th of the transfer value. She’s well chuffed not to be as well off as she could have been.

    • I think the average IFA (with their less complex model) would have serious ill health commutation at the forefront of their mind for a customer with a DB scheme and only weeks to live. No wonder journalists rightly ok we are all cowboys focused on gathering assets onto our preferred platforms… r wrongly thin

  6. MM -“Paul mate, its looking a bit quiet next week, going to need some serious click-bait Monday”

    PL -“no problem, still got tons of it here, on its way! “

  7. I’d like to say thank you to Bryan Jones for such an eloquent statement of the middle ground. It is one I share as far as it goes, and would expand upon.

    Whilst the ‘can’t pay, get stuffed’ brigade can happily continue to insist that the ‘great unwashed’ eat cake – some of us are actually concerned that whilst there are many excellent consequences of the cult of professionalism that has engulfed financial services – the unintended, undesired, and unfortunate consequence that sits on the conscience of those of us with a social awareness is that many many individuals are held back by the Victorian attitudes that are beginning to prevail that the uneducated have to be ‘protected’ from aspiring for something better. Technology may be the solution in the future, but it is not now. Proper regulation may close the gap if our regulators ever find the chutzpah to write it. But in the meantime the imperfect provision of contingent advice is the nearest solution we have – with all its serious shortcomings.

    We could make deliberate mis-advice a serious criminal offence carrying jail time – not merely for those that deliberately steal, but for those who are clearly negligent. It’s a complex line, but that’s what the courts are for, to draw such lines.

    The cases which need to be addressed are easy to see with hindsight – but foresight gives us plenty of clues – non mainstream investments, introduced business. There are signs that things could go wrong. Focus on these, and regardless of contingency matters will improve. Simply ban contingent charging, and the fraudsters will find another way.

    • ‘can’t pay, get stuffed’ brigade? I wouldn’t put it quite like that but, when all is said and done, we’re commercial enterprises with commercial overheads and commercial responsibilities, not charities or publicly funded bodies. And I’m sure we all have our fair share of barely profitable clients and/or we make time now and again for someone who just needs a 20 minute chat about something or other but who doesn’t actually have a worthwhile amount of money to invest.

      If somebody walks into a Mercedes showroom and says: I’d like to buy a C43, can you sell me one for £5,000? the response is fairly easy to predict. Likewise, somebody who asks a master tailor to make him one of his finest suits for just £500 will be politely shown the door.

      That’s the real world.

  8. Firstly may I say that I do not agree with contingent charging, but that does not mean I will not defend a PRIVATE company’s right to charge in what ever way for the service they offer and not to have the politicians, regulators or indeed journalists, trying to impose their sanctimonious views on how a private company charges so long as it is agreed with the client up front.

    We are not ruled by a Stalinist regime (but sometimes it feels that way), owners of companies take financial risks ever day. If they got state handouts I could understand, but they don’t, so stop interfering and put your own houses in order first.

  9. A fee, be it contingent or otherwise, is still a fee agreed with the client in advance of any work being undertaken. Commission, on the other hand, was an inducement paid by a product provider, these are two very different things.

    Commission led to a clear conflict of interest in terms of which product the unscrupulous adviser might recommend and it was this that brought about the RDR.

    We cannot force clients to deal with us and neither can we force them to sign fee agreements with which they are unhappy; if they don’t like contingent charging they are perfectly capable of saying so.

    There will always be and have always been charlatans in every industry and profession and in a well meaning attempt to weed out this minority, we run the risk of disenfranchising yet more people who need advice by limiting the options with which they have to pay for it.

  10. Paul, I am so glad you said “I am not here today to say trail should be banned” but then you ruined it by saying “(though it should)”.
    It’s a good job you aren’t a financial adviser if lies trip off your tongue so easily.
    Give it a rest unless you can come up with an absolute foolproof method of payment, where a client can’t be
    mis-sold, old chap.

    • So why shouldn’t trail be banned Patrick? It is after all a form of commission, one that’s paid from the provider to the adviser at the cost of the client.

      If your clients are willing and able to pay an ongoing fee, surely that should be agreed directly – without the need of a third party to be involved?

      • Nicholas Pleasure 13th August 2018 at 4:04 pm

        In a perfect world you’d just swap trail for an advice charge. It would be clear, transparent and make Paul happy.

        However, where you are discussing legacy products and legacy systems, there is no facility to add an adviser charge and no business case for the provider to update their software to do so.

        So the trail is switched off but the charges stay the same. The client then has to pay an extra charge to the adviser for the service that was previously paid for by the provider. Not a great outcome.

        Even the FCA seems to have accepted that to switch off trail would be a massive disservice to consumers. It is a legacy of the old system and it will die soon enough.

        • I’m having an interesting discussion with an insurance company based in the east of England about an old bond with trail (which was less than 1/2% as some was given up to reduce the AMC, as well as the reduced initial which also had some of the further reduced initial also used to enhance the investment content).
          The insurance company are going to pocket the non-payment of the trail as they refuse (so far) to reduce the charges – the clients are both higher rate tax payers so can’t encash and reinvest, and I am waiting for a response to how the TCF issues which arise are going to be dealt with. The amount at issue is around £800 pa so it’s not trivial – I am waiting with bated (baited?) breath.

          I also see the difference between trail received typically on a bond with reduced initial (going back to the 90’s or earlier) and an OEIC/unit trust/ISA where it was just 3+1/2 and at least in an ISA a switch can often be made to a clean share class, but an old bond is a completely different situation – the insurance companies are happy to get the extra income to the detriment of the client.

      • “So why shouldn’t trail be banned Patrick? It is after all a form of commission, one that’s paid from the provider to the adviser at the cost of the client.”

        So Matt exactly like the FCA fees we have to pay ……. we the industry is the “provider” paying the FCA and its cronies at the cost of the client !

        Nice one , I agree with you for once ….ban it !

  11. Another tirade from a vastly over paid member of the 4th estate (BBC wages anyone? Good but obviously not enough for this guy) I seldom agree with D Trump but he has it right on fake news. If in doubt-make it up.

  12. Paul – is the integrity of your journalism or that of others impeded by the need to maintain listener and reading figures?

    Seems like a conflict of interest to me.

    Conflicts exist all around us. What is important is how you deal with them. For me as an adviser, my priority is looking after my clients’ best interests and that underlying principle guides everything I do.

    The answer isn’t banning contingent charging. Banning those who can’t demonstrate how they manage their conflicts effectively is.

  13. Trevor Harrington 13th August 2018 at 4:51 pm

    The issue is not commission or fees, and it never has been.

    The issue is :
    “Does the client know precisely how much he is paying?”

    After all, even if you agree a fee, be that before, during or after a function, and be that fee something or indeed nothing, the very next question will be :
    “where shall we take this Fee from Mr Client? Do you want to pay for it directly from your bank account, or would you like it to be taken from your investment as we transact it?”

    To suggest that anything taken from the Clients investment is automatically commission, whereas if it is taken from the Client’s bank account it must be a fee, is nothing short of puerile childish nonsense.

    All professions do some work for nothing for clients, in the expectation, and I may say “speculation”, that they will be paid later in some other function.

    Even the redoubtable Mr Lewis works in this way, in fact probably more so that most, in as much that if he does not write something contentious, his scribblings won’t get printed, and he won’t get paid.

    I object to Mr Lewis and his worthless scribblings because he denigrates a difficult profession, for his own journalistic gain, without even attempting to be constructive about the problem, and he ventures no logical solution to that problem.

    Now, if he suggested that “hard disclosure” should be revisited, with the hard numbers showing the Adviser remuneration ON THE FRONT PAGE, or if he suggested that all Advisers should declare their TOTAL earnings to the client in an annual statement, then I, and many others would be happy to entertain the fellow.

    As it is, he simply bleats BAN IT BAN IT BAN IT, without the slightest idea of what the consequences might be, to both the client, and the profession.

    I would urge you Paul to think before you speak, or write, and in the meantime I would urge journalism to ignore the fellow, until he can be more constructive, and less avaricious in his own quest for earnings on the back of ill thought out contentious rubbish, which unfortunately can be quite damaging to all concerned, particularly the clients.

  14. During the Retail Distribution Review a number of commentators pointed out to the regulator that adviser charging (on a contingent basis) was pretty much a replacement of the commission model albeit with even more disclosure (client agreement)

    I am not a fan preferring a transparent project fee that encompasses financial planning, advice and implementation (the latter item in my view being the easiest least valuable part of the mix)

    One example we saw recently was an advice fee of £1,000 with positive advice to proceed which came with an adviser charge of 4% amounting to £20,000. I couldn’t really understand why the charges were that way round.

    All that said I don’t see how the regulator can abolish contingent charging for DB transfer advice without doing the same for every other type of investment or pension advice advice.

    After all if Paul is right and contingent charging leads to advisers recommending a transfer when it is a marginal decision surely it also biases the advice about investing rather than saving, spending or giving it away?

    I really do think that consumers should be given choices about how they pay for financial advice and the market does that already. It must be the case that commission abolition has reduced consumer access to advice otherwise why do we need FAMR? I suspect abolishing contingent charging will further reduce access.

    Note to Editor: There is a real risk that “attacking the poster rather than the post” is going to turn MM into another version of NMA I’m pretty sure you don’t want that do you?

  15. It always never ceases me from smiling….Journalists MP’s and the regulator (to a degree) focus on how we pay ourselves.
    Yet in a sister article we here clients are losing an average of £91,000 to scammers

    Kind of makes you think, do some people’s own opinions weigh so heavy on them that they feel they need to write at their own disgust on how we pay ourselves……(are there not bigger issues?)

    I openly admit we don’t get it right all the time,and fail badly at times, but surely its about the “advice” ….. ?

    It seems getting behind the people who try to do a good job to the best of their abilities to rid us all of the (real) problems blighting this industry is beyond some ?
    Its far more sporting to keep knocking them, lets face it the crooks and scammers are not your problem are they ?

    • I pretty much agree with you, they are focusing resources and the argument on something that is not as damaging as the scammers.

      A simple triage service is what is needed for final salary pensions, much in the same way as many of us work on non DB transfer business, i.e. a research fee, an advice fee and then only of there is any implementation to do a final implementation fee.
      Breaking each bit down in to stages when the FCA’s position on DB transfer remains the starting point should be the consumer remains, means that at each stage you can have a (chargeable) conversation discussing facts which at any point may mean the consumer concludes that they have paid for enough discussion of information to reach an informed decision NOT to pay for or take advice as to whether to transfer.

  16. I do not think something should be banned simply because there is a conflict of interest.

    My car goes for an MOT in the next few weeks. The garage clearly has a conflict of interest because it could say that it needs work done that is not actually necessary.

    I went to see my dentist last month – he could have said I needed work done that was not necessary as well.

    In each case it is a contingent fee.

    The FCA handbook addresses the conflict of interest in Principle 8.

  17. John Hutton-Attenborough 14th August 2018 at 12:19 pm

    Peter. In both of the examples you use the garage or dentist is going to get paid either way. For the initial test/ check up which you have to pay for even if pass/ fail or no work/ filling. They get paid for doing the work. If they do a jolly good job you go back again and again. If you feel you have been ripped off then you wont…

  18. Commissions permit the companies (The Principal ) under the Law of Agency – to bully and intimidate their agent e.g endoowment scams pension scams – where the investment rate on endowments was deliberately increased to decrease the premium, to be ” affordable ” yet in reality it was to claim the busienss by deceit against the client. The forward planning of insuranc ecompanies menat the premiums ( and atheir agents commissions would increase ) taken from the cleint funds deliberatley and sinister deceit by fiancial institutions – and their agents RBS Lloyds Barclays along with national brokers /IFA’s ( who are not Independent as they are agents of their principal or Principals. These institutions operate a pyramid selling/multilevel marketing organistaion which is unsustainable as consumers have seen Equitable Life Scottish Widows and latterly Standard Life – who were once reveered and now almost insolvent – and picked off by the Banks. These are not in the consumers best interest and the FCA reduced the amount into Endowments accordingly leaving these dodgy traders to provide a better product – they have failed to come up with one. Therefore the default is Cash ISA which may have no fees- unlike Robo Advice or index tracking funds.
    The problem is those wh o have been deceived or duped into purchasing an “insurance product”.

    • I see Ian Lees and Paul Lewis alike are still playing their same old scratched records. It’s about time someone kind individual took the old chaps to one side and told them it’s 2018, and recommend they upgrade to iTunes and Spotify.

    • Ian Lees, I am not entirely sure I understand your point, let alone your prose.

      a cash ISA is not ‘fee free’ in the sense you describe fees and the examples you give – the provider earns money on the deposit, and pays (less) interest to the ISA holder – the difference is the ‘fee’. Unlike the examples you quote of robo advice or index trackers the ‘fee’ on a cash ISA is opaque, and I think you’ll find when you do the analysis it dwarfs that of your transparent fair and open examples.

      I presume you would also be in broad support of a return to ‘old style’ traditional with profits where there are no ‘fees’.

  19. Another nasty little authoritarian rant. There is absolutely nothing wrong with commission as long as IFA’s declare it up front.
    And as I recall in the past didn’t AKG look into commission and produce a report saying that there was no evidence of commission bias?
    Also, at least commission isn’t income from coercion which Mr Lewis BBC income is. If you don’t pay the telly tax then eventually men with badges an guns will turn up to force you to pay.

  20. I agree with all those critical of Mr Lewis. His rantings are ignorant and if taken seriously, would cause further harm to consumers. We already have an advice gap caused by over regulation and he wants to further dictate to consumers what they can and cannot do in a commercial environment. Reading recent FCA consultation papers it appears we are slowly moving towards nationalisation, so prescriptive are the proposals getting. This will no doubt be well received by those on the left, like Mr Lewis, but please don’t pretend this will improve consumer outcomes.

  21. Where have his eyes gone?

  22. Whittington Dick 18th August 2018 at 5:56 am

    There are clients who are content with non-contingent charging, there are also those who are not.

    Whilst the latter might understand the logic behind it, when it comes to the crunch, they would none-the-less become disgruntled at being asked to pay for advice telling them to maintain the status que, perceiving such a charge to be the adviser doing “nothing” for their money, as (ironically), no transaction has taken place…

    You can explain the logic of non-contingent charging (which I whole-heartedly agree with – why would I want to risk doing all the donkey work for nothing?), until you are blue in the face, but they would still feel aggrieved if asked to pay for a recommendation to stay put; It’s just human nature in some.

    The point is, as many above have already mentioned, whatever the charging structure may be, if the client has that charge clearly explained and disclosed, he/she/they are content with it, and the adviser is happy to oblige them in the way they wish to pay, then what, exactly, is the problem?

  23. It is good to have an alternative such as a journalist to challenge such matters as Advice commissions in their sponsored papers and often jaundiced reporting – rather than journaistic approach (for which they were trianed – we assume). Commission serves the masters – theinsurance companies and their like to bully and make targets and manipulate – rather than serve or provide service.
    I do not feel commissions to be appropriate as it is not transparent (for fees or charges. Secondly you cannot serve two Masters (or Mistresses) – as the appointed agent. It is misleading, dishonest and creates confusion or fear. IFA’s who rely on commission from their masters (whether as percentage fees or disclosed commissions) is misleading if not devceit – reporting fees to their target client, whilst reporting it as commissions to HMRC and FCA ( such as Mrs F A with a certified financial planner (CFP) from the IFP ?The use of platforms to accommodate these ficticious misleading statements under the FCA Rules – is wholly unnaceptable.

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