The Financial Conduct Authority (FCA) is consulting on plans to ban contingent charging on defined benefit (DB) transfer advice.
In a consultation paper – CP19/25 – released this morning (30 July), the regulator expressed concern that too many advisers were delivering poor advice, much of it driven by conflicts of interest in the way they are remunerated.
It described contingent charging as “an obviously conflict of interest” and, as such, argued the practice should be banned except from specific groups of customers with “certain identifiable circumstances”.
In the minority of cases where contingent charging was permitted, the FCA said, advice firms would have to charge the same amount, in monetary terms, for advice to transfer as they charge when the advice is non-contingent.
Interested parties have until 30 October 2019 to respond to the consultation. The watchdog said the ban on contingent charging “should” come into effect within a week of the board making a final decision.
The FCA is also looking to address potential conflicts of interest that arise where an adviser advising on a pension transfer stands to receive ongoing fees – which in some cases, it pointed out, can be for 20 or 30 years following the transfer.
Additionally, the FCA proposed advisers will be required to demonstrate why any scheme they recommend is more suitable than a consumer’s workplace pension scheme.
FCA executive director of strategy and competition Christopher Woolard said: “The FCA’s supervisory work has revealed continued problems in the pensions transfer advice market.
“By making changes to the way advisers are paid for transfer advice and the other changes to transfer advice we are proposing today, we want to ensure people receive suitable advice and drive down the number giving up valuable defined benefit pensions when it is not in their interests to do so.”
In the past, the Work and Pensions Committee (WPC) has consistently argued advisers could be incentivised to give bad advice – for example, recommending a DB transfer where inappropriate to do so – when using a contingent charging fee structure because they are only paid if the client goes ahead with the transfer.
In the wake of the committee’s freedom and choice inquiry, however, and after a previous consultation, the FCA decided to hold off on making any changes to its rules on contingent charging for DB transfers, arguing the evidence did not show “contingent charging is the main driver of poor outcomes for customers”.
Earlier this year, the WPC again asked the FCA to explore alternative means “for addressing the problem of contingent charging”.