A few rogue advisers have thrust contingent charging into the spotlight and banning the charging method is not the answer, Personal Finance Society (PFS) CEO Keith Richards has argued.
Yesterday (7 January) the Work and Pensions Select Committee launched an inquiry into contingent charging on defined benefit (DB) pension transfer advice.
In a previous inquiry into pension freedom and choice, the committee found advisers could be incentivised to give bad advice, such as recommend a DB transfer where it was inappropriate to do so, because they were only paid if the client goes ahead with the transfer. At the time, it suggested the practice should be banned.
The new inquiry will look into whether contingent charging increases the likelihood of unsuitable advice being given, as well as what the impact of a ban could be, and how negative effects might be minimised.
Despite MPs’ concerns, Richards (pictured) argued contingent charging appealed to consumers for its convenience, and banning it was not the answer.
“The increasing scrutiny of DB transfers following the British Steel Pensions Scheme fiasco has thrust several important issues into the spotlight with some calling for a total ban on contingent charging,” he said.
“Based on a minority of advisers seemingly putting their own commercial interests above that of the client, and the Financial Conduct Authority’s starting position that a transfer is unlikely to be in most consumers’ best interests, the select committee do not accept that an advice fee for the initial review should be dependent on a transfer being the outcome.
“The separation of an initial review or recommendation fee from any dependency to transact is of course one way of recognising the potential conflict, as well as setting client expectations that a transfer may not be a suitable recommendation from the outset.”
Richards said it was “essential” the advice sector took voluntary control of the “unintended consequences” of pension freedoms, thus “negating the need for more draconian regulatory rules potentially impacting wider consumer choice”.
He continued: “Professional indemnity insurers are alert to the issue – as are ambulance chasers – so we need to take control.
“Conflicts of interest will always exist, which is why it is important to demonstrate our acknowledgement and mitigation of the conflict to ensure we preserve appropriate client options for fee charging. We also have the opportunity to demonstrate that professional advice itself has evolved to be the product.”