Intelligent compromise the solution to contingent charging dilemma

As Parliament's Work and Pensions Select Committee (WPSC) sets about revisiting a question the FCA has already posed and the committee has already answered, Hannah Godfrey assesses the future for contingent charging

Is contingent charging the financial advice sector’s Brexit? Certainly it is a topic that drifted into the spotlight, was talked about for a while and was then, seemingly, put to bed.

Out of nowhere, however, we seem to be having a second go at it. Contingent charging is now receiving its own ‘people’s vote’ – or ‘people’s hearing’ at any rate – and advisers have every right to roll their eyes.

Has anybody thought to ask if this a sensible way to spend time and resources? Last year, the WPSC urged the Financial Conduct Authority (FCA) to ban contingent charging following a probe into the British Steel pension scheme scandal. Given the case studies the committee examined, it was bound to conclude that banning contingent charging was the best way forward.

MPs were looking at a sample of cases where the advice given was terrible and the outcomes yet more awful. Granted, had contingent charging been banned at the time, these steelworkers would arguably not have had an initial meeting with unscrupulous advisers and introducers, and subsequently not been persuaded to transfer out of their defined benefit (DB) pensions. Maybe. But, then again, maybe not. They were not exactly subject to usual advice practices.

Despite the WPSC’s concerns, work carried out by the FCA concluded the link between contingent charging and unsuitable advice was not as clear-cut as some argue, so the regulator decided to hold off on any changes to its rules.

“It is generally hard to show a direct link between unsuitable advice and firms using contingent charging models,” observed the FCA’s policy document PS18/20, published in October 2018. Responses to the FCA’s probe into the charging method had been mixed, with some compelling arguments on either side of the debate.

Sensibly enough, the regulator acknowledged it needed to carry out further analysis of the issues discussed through its ongoing supervisory work and related workstreams, such as the Retail Distribution Review and Financial Advice Market Review.

“Charging models are only one of the potential drivers of unsuitability, and they need to be considered among other factors,” the document added, rather stating the obvious.

Yet here we are, with Parliament asking the question again, and whether or not this is a waste of time does not matter. It is clear the WPSC has made up its mind that contingent charging on DB transfers is a bad thing, and this inquiry will doubtlessly be used to further pressure the FCA into real action.

An unanswerable question?

So where should we go from here? Broadly – and, again, not unlike Brexit – there is no single right answer. On the one hand, contingent charging can lead to poor consumer outcomes.

Ignoring the bad apples, it is conceivable even the most principled of practitioners could be subconsciously swayed to advise clients to transfer away from their DB scheme.

If that is the only scenario in which someone gets paid, then they may subconsciously strive to disprove the FCA’s starting assumption in this area – that DB transfers are not in the interests of the consumer – rather than proving it to be correct. The thing about subconscious biases, after all, is they are subconscious and cannot always be avoided.

That said, carrying out DB transfers has become risky business. With added professional indemnity costs and ever-increasing regulatory scrutiny, advisers would be mad to suggest a transfer just to line their pockets when a real consequence could be a hefty ombudsman fine, or even losing regulatory permissions. If anything, any subconscious bias could swing too far the other way.

Looked at from another angle, meanwhile, contingent charging offers direct access to financial advice to those who may feel they are unable to afford it otherwise. Without contingent charging, potential clients with less cash in the bank – but who harbour an attractive transfer value – could lose out because they cannot access advice that could be beneficial to them. We must not forget that a DB transfer can be the best outcome for some clients.

One could argue that by, charging an upfront fee, advisers are doing a disservice to those who need them most. It’s starting to seem like DB transfer specialists are damned if they do, damned if they don’t.

Webb’s feat

But perhaps there is a third way, lurking in the mind of a distinguished former pensions minister. Earlier this week, Steve Webb mooted a compromise – always a sensible suggestion in times of uncertainty – in the form of allowing clients to pay for DB pension transfer advice from their DB pension rights. The logic, he said, was that it dealt with conflict of interest issues and avoided locking out potential, needy clients.

The Royal London director of policy said the amount charged by advisers would be unlikely to have a material impact on a client’s standard of living and would enable them to obtain advice on whether a transfer was a good idea.

When it comes to difficult questions with lots of moving parts, the best answers tend to be those rooted in compromise. For those with access to advisers who are able to give advice and ignore ideas of a glittering pot of money, banning contingent charging will be a real loss to them.

But, for those who are unfortunate enough to come into contact with the more unscrupulous in the sector, a ban could save them from terrible advice. With the right limits in place, perhaps Webb has come up with a solution to financial advice’s supposedly unanswerable question.