Pension 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.”