Pension providers urge caution as MPs debate contingent charging ban

Westiminster houses of parliamentPension providers have urged MPs to proceed with caution as they open an inquiry into whether or not contingent charging should be banned.

Earlier today, the work and pensions select committee announced it would launch a probe into contingent charging in the wake of concerns over a potential link between fee models and poor defined benefit transfer advice.

The MPs on the committee took evidence as part of their investigation into the British Steel Pension Scheme’s failure, and recomended that the FCA ban charging models where the adviser only gets paid if a transfer goes ahead.

The FCA committed to conduct further analysis of the issue given there was no clear evidence yet that contigent charging was directly linked to bad advice outcomes.

As MPs take a deeper look at the contingent charging, pensions market leaders have expressed concerns an outright ban on contingent fees could reduce access to DB transfer advice.

Aegon pensions director Steven Cameron says: “We urge the select committee to keep an open mind in its inquiry into contingent charges for DB transfer advice. Contingent charging can create conflicts of interest, but an outright ban should be a last resort option as it will exacerbate the advice gap. Regulatory policy shouldn’t be based on stamping out isolated instances of bad practice, particularly if this could constrain how the vast majority of professional advisers serve their clients.

“Advisers and their clients should have a range of means of paying for advice, provided these do not present unmanaged risks of unsuitable advice. Some individuals prefer to pay for advice on a contingent basis rather than ‘upfront’ and it would be unfortunate if this group found themselves barred from considering transferring.”

Hymans Robertson partner Ryan Markham adds: “The work and pensions committee’s decision to act on some of the worrying evidence of poor advice given to members of the British Steel pension scheme is much needed and welcome news for the industry. At a headline level, a ban on contingent charging would be powerful in improving confidence in the advice market and resulting member outcomes.

“However, any proposed change should be considered extremely carefully to ensure it doesn’t cause any unintended harm to the market. Banning contingent charging could be highly disruptive for advisers and is unlikely to be straightforward to implement given the broader link to charging structures for managing investments and providing ongoing financial advice.

“An outright ban on contingent charging may also lead to a reduced number of advisers operating in the DB to defined contribution space and a reluctance for members to take advice if they have to meet upfront costs directly. This feels a particular barrier for members with small pension pots where the costs of advice are highly material in the context of the size of their pension fund.”

Adviser trade body Pimfa also opposes an outirght ban. Senior policy adviser Simon Harrington says: “We maintain the position we laid out in May 2018, namely that the removal of contingent charging will not necessarily improve the quality of advice consumers will receive or, indeed, improve their overall outcomes, and we reiterate the unintended consequences of imposing such a ban.

“Removing contingent charging without a viable way for individuals to access advice will ultimately turn people away from an absolutely indispensable part of the retirement planning process. Further, it will increase the number of insistent clients who do choose to access advice and in the worst circumstances push them towards poor advice options that will ultimately deliver to their wishes – a transfer regardless of their circumstance.”

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. I wonder do the MP’s actually know the cost, liability and risk DB Transfer advice imposes on advisers businesses.

    It is easy to judge, but without the full picture you cannot come to the right decision. Out right contingent charging is not right, I agree. It does cause conflicts of interest. However, a meeting at the advisers expense for guidance, a further meeting fee based for advice and report, followed by a transaction fee if a transaction is to proceed would be manageable and should be acceptable to all.

    The cost to an advisers PI every year means any initial profit made from transferring any DB arrangement is canceled out within a few years and becomes a massive liability which is unsustainable to the advisers business in the long term.

    Advisers are a business, have to cover their costs and any DB advice completed correctly is a very expensive and dangerous undertaking.

  2. Agree with Martin, our PI excess is now 20k, so the liability is so high we have to ensure that we are paid for advice, and make sure that only the best quality clients are allowed to transfer, so by default that will shrink the advice market.

    • “Only the best quality clients are allowed to transfer”??? So you’re saying that low-quality clients just have to suck it up in their DB scheme?

      Surely, the point is that the advice has to be right for EVERY client. I honestly don’t see how the “quality” (however defined) of a client affects the irreversible, life-changing decision to give up guaranteed benefits.

  3. Sad reality is that access to DB transfer advice will now be limited to those that can afford significant fees.

    The cost of PII for DB work is a bigger issue than non contingent charging. We need to see some ideas from the FCA about how they will preserve access to DB advice or it will disappear completely when firms consider the cost and potential risk it represents.

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