FCA bans contingent charging on DB transfers

Hannah Godfrey reports...

The Financial Conduct Authority has banned the use of contingent charging in defined benefit (DB) transfer advice.

In a policy statement issued on Friday (5 June), the regulator said the ban will remove conflicts of interest that arise when a financial adviser only gets paid if a transfer goes ahead.

The FCA also said the ban would help “good advisers”, who will often advise clients to stay put, to compete. It will come into effect from 1 October 2020.

The regulator said to address ongoing conflicts, advisers must now consider an available workplace pension as a receiving scheme for a transfer and, if they recommend an alternative solution, demonstrate why that alternative is more suitable. The regulator said it believed these measures would help reduce the need and costs for ongoing advice.

The FCA will also implement proposals allowing advisers to provide an abridged advice process which will help consumers access initial advice at a more affordable cost. The abridged process can only result in a recommendation not to transfer or a statement that it is unclear whether a consumer would benefit from a pension transfer without giving full advice.

A ban on contingent charging has been on the cards since March 2018, when the FCA consulted on improving the quality of pension transfer advice. In October 2018, it delayed its decision, noting evidence did “not show that contingent charging is the main driver of poor outcomes”.

However, in the latest consultation paper, published last summer, it revived the idea, stating contingent charging was “an obvious conflict of interest”, and proposed just a specific group of customers with “certain identifiable circumstances” should face the charges.

In March just days after the UK when into lockdown because of the coronavirus pandemic, the FCA postponed its final decision on whether to ban contingent charging, noting the revised handbook was due to be published in the second or third quarter of the year.

Details of the decision

The FCA said authorised firms were the group most likely to object to a ban on contingent charging, although it acknowledged there was some support within the industry for a ban too. However, it said those opposed to the introduction of a ban “did not provide any compelling evidence that an alternative approach would be more effective”.

As for the “specific circumstances” where contingent charging will still be allowed when the ban comes into place, the FCA said these customers will have “certain identifiable circumstances”. These are people who may be not be able to afford non-contingent advice charges and are more likely to benefit from receiving advice.

Specifically, the FCA said these vulnerable customers fall into two groups: “The first is those who have a specific illness or condition that causes a materially shortened life expectancy. The second is those who may be facing serious financial hardship such as, for example, losing their home because they are unable to make mortgage or rental payments.”prof

However, the FCA said those specific customers, who are an exception to the ban, should not pay any higher charges than those who do not pay contingent fees. The watchdog also said some firms have previously charged less for advice where the decision was not to transfer. Under new rules, however, firms will have to set a total cost for their DB advice.

In a bid to prevent a ban coming into place, a number of people told the FCA a ban would have some unintended consequences. These included:

• an increase in the proportion of recommended transfers, as advisers would be reluctant to give ‘advice to do nothing’ when having to charge significant amounts

• conversely, others felt there would be a growth in the proportion of recommendations not to transfer as it would be ‘easy money’

• a potential growth in insistent clients who may feel they have the right to transfer, having paid for advice, resulting in more standalone advice firms and providers making these transfers for insistent clients

Some firms also questioned whether there should be extra rules for vertically integrated firms. They argued that such firms that only recommended their own products post-transfer had an extra layer of conflicts of interest. Respondents to the FCA’s papers suggested they could game the rules by charging more for their products and less for the actual advice once a ban was in place.

In respone to those worries, the FCA said: “We agree that VIFs should not be allowed to cross-subsidise charges for pension transfer advice with product charges, and undercut other advice firms due to their business model. We consider both our existing rules and the rules implementing the ban on contingent charging prevent this.”

The FCA’s justification for a ban

As for why the FCA eventually decided to introduce a ban on contingent charging, it gave the following reasons:

• There is a clear conflict of interest in charging on a contingent basis for DB transfer advice where the only two outcomes are transfer or do not transfer

• There is a coincidence of advice to transfer and contingent charging: most advice results in a recommendation to transfer and most firms contingently charge

• Most consumers will not be materially harmed by remaining in their existing DB scheme if they choose not to take advice, and the carve outs mean there will only be a small number of consumers who are likely to benefit from a transfer but cannot afford advice

• As most consumers would not benefit from a transfer, the FCA expected the ban to be effective in reducing both the number of consumers who proceed to a transfer following advice and the harm that unsuitable transfers cause

• A ban places a value on advice itself rather than on a transaction so helps to enhance market integrity

• A ban prevents cross-subsidies by those who transfer and pay excessive amounts, with up to £10,000 not being untypical, for advice which is free or low cost to those who do not transfer

• In the current charging model, consumers do not recognise or weigh up the cost of transferring as it is dwarfed by the transfer value on offer and only deducted after the transfer has taken place