The pros and cons of contingent charging – FCA paper

Hannah Godfrey writes...

The FCA has refrained from any changes to its rules on contingent charging for DB transfers in today’s policy paper but what did respondents to its original consultation have to say about the idea of a potential ban?

Thursday’s final rules and guidance paper followed a consultation by the regulator that said it was “considering if it is necessary to intervene in the way charges are levied for pension transfer advice”, which it added could result in a ban on contingent charging.

After receiving a variety of responses, Thursday’s policy paper PS 18/20 said: “The evidence it [the FCA] has seen does not show that contingent charging is the main driver of poor outcomes for customers”, which ultimately resulted in the regulator putting a pin in any plans to ban the charging structure.

With strong feelings expressed on both sides of the debate, Professional Adviser dug into the paper to find the pros and cons of contingent charging, according to the consultation’s respondents.

In favour of a ban

The main reason behind favouring a ban on contingent charging for defined benefit (DB) transfers was the idea it has caused an inherent conflict of interest. These respondents argued contingent charging models risked incentivising the recommendation of a transfer that resulted in unsuitable advice. Several respondents went as far as likening contingent charging to commission.

This argument has been voiced numerous times before by influencial commentators. Earlier this year, for example, Work and Pensions Committee chair Frank Field suggested genuine independence was not compatible with a charging model that only rewarded advisers for recommending a particular course of action, while BBC journalist Paul Lewis has described it as a “hangover” from commission.

Others, meanwhile, worried the charges generated by contingent charging models greatly overstated the true cost of advice for those proceeding with a transfer due to a cross-subsidy of costs benefitting those who do not transfer.

Opposing a ban

A greater variety of arguments were presented that opposed banning contingent charging for this type of advice. Broadly speaking, respondents were worried about the availability of advice in the future and, in particular, that vulnerable consumers may not be able to access advice while many others – taking advantage of pension freedom. As such, the DB market could become the preserve of only wealthy consumers.

Additionally, respondents suggested banning contingent charging could promote poor advice because less well-off consumers – or those with smaller pension pots – might seek out the cheapest advice, which may be less likely to be suitable. Or, respondents said, they could end up looking around for advisers known to be sympathetic towards transferring.

Some thought the number of insistent clients would increase if there was a ban, while others pointed out there was no clear evidence of a causal link between contingent charging and unsuitable advice that would support regulatory intervention. Still others pointed to evidence of poor advice where non-contingent models had been applied.

There were also respondents who were sceptical of the regulator’s ability to police such a ban, with some suggesting firms would find a way around a change in rules.

Additionally, respondents pointed out contingent charging was not the only charging model that could incentivise advice to transfer. It would be “too easy” for advisers, some said, to charge a minimal amount for an initial pension transfer, and then impose ongoing charges for years to come.

Other respondents simply argued there were legitimate reasons to charge more when advising on a transfer. They pointed out pension transfers required more work and carry significant regulatory risk and liability, as well as potential additional professional indemnity insurance costs.