FCA contingent charging ban dubbed ‘draconian’

Some advisers have described the Financial Conduct Authority’s (FCA) ban on contingent charging for defined benefit (DB) transfers as a ‘draconian’ measure that could lead to less advice being given to those who need it.

The FCA on Friday (June 5) banned the use of contingent charging in DB advice, except under certain circumstances. The new rules come into place on 1 October.

The ban has been expected since the FCA’s consultation on pension transfers in October 2018 and is designed to stamp out conflicts of interest that arise when advisers only get paid if transfers go ahead.

The regulator will also implement proposals allowing advisers to provide an abridged advice process that was designed to help consumers access initial advice at a more affordable cost.
Yellowtail financial planning owner and Chartered financial planner Dennis Hall said that, while the ban was something the industry had anticipated, he thought is was a draconian measure by the regulator and that it seemed a “blunt tool” to solve a problem and would result in people missing out on advice.
“The consequence of this is there’s a carve out for those people who are seriously ill or seriously poor who need to take advice and would have to use their pension to pay for it, the very wealthy who can afford to pay fees and what take a look at it through a refined triage system.

“The people who are going to be the most disintegrated and will be priced out of this will be middle England – those people who could probably afford to pay but on top of everything else may not be able to spend that without knowing what the outcome is.

“From the FCA’s perspective, it is draconian – there’s a huge swathe of the market that are just not going to take advice even if it was in their best interest, because they cannot afford the potential for someone to say this is not in your best interest.”

Hall added: “Instead of removing the problem, which is bad advice, it’s removing advice.”

The abridged advice 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, the regulator said.

Handford Aitkenhead & Walker Chartered Financial Planner Alasdair Walker described the measure as “throwing the baby out with the bathwater” and said it could be costly for investors.

“The new gated process of abridged advice and full advice, consumers will lose out there they perhaps wouldn’t have before. If the abridged process leaves the process open and the full advice process gives a clear no recommendation, that might cost the end consumer potentially thousands of pounds,” he said.

“Broadly I think it’s a positive move, but I think there’s a bit of the baby being thrown out with the bathwater, but probably necessarily.”

Aegon pensions director Steven Cameron agreed that the ban ran the risk of “further reducing access to advice on DB transfers” at a time when the coronavirus pandemic meant for some individuals, it is needed more than ever.

“We fully support the FCA’s desire to ensure DB advice is of a consistently high quality, and reflective of the current uncertain environment,” he said.

“In Aegon research shortly before the coronavirus crisis, an overwhelming 84% of advisers said a ban on contingent charging will reduce access to advice. Some individuals simply can’t afford to pay upfront, even where transferring might have been in their interests, and with advice legally required ahead of transferring, the ban means some will be unable to explore their statutory right to transfer.

“Not all advisers support contingent charging and many do accept that it could create the potential for bias in recommendations. But it’s regrettable that the FCA and industry couldn’t have found a way of addressing this conflict of interest.”

IFS Wealth and Pensions Chartered financial planner Ricky Chan said the ban would likely reduce referrals of clients seeking DB transfer advice due to the costs involved, particularly if they do not come under the “carve out” category for contingent charging exemption.

“Across the industry and profession as a whole, we’ll likely see a dramatic fall in DB transfers as a result of the contingent charging ban as the upfront costs (which were already high) can mostly no longer be deducted from the transfer value,” he said.

Personal Finance Society chief executive Keith Richards welcomed the move by the FCA, but expressed concern about the exceptions to the ban pressuring advisers to facilitate pension transfers in ambiguous situations.
“For example,” Richards said, “it is often very difficult to predict the precise impact of poor health on longevity, and these rules will put advisers in a position where they have to make a judgement on client’s health that could either leave the client disappointed, or create issues with compliance with the FCA’s rules.”
He added that, while abridged advice was a superficially attractive service, “the complexity of pension transfer advice and the potential liabilities that arise from giving the wrong advice will mean that few advice firms will have the risk appetite to implement this service in practice”
Lane Clark & Peacock partner Steve Webb said the pandemic would lead to a surge in interest among people aged over 55 in accessing their DB pension, which meant affordable quality advice was more important than ever
“It is right to crack down on firms who have given poor quality advice.  But forcing members to pay high upfront charges for advice will act as a barrier.  For those who do find thousands of pounds up front for advice there a risk that they will then be determined to go ahead with the transfer even if it is not in their best interests,” the former pensions minister said.
“Successful regulation would have left members with a wide choice of quality independent advisers. Instead, poor conduct by some advisers and poor regulation means that the DB transfer advice market is simply not working.”
AJ Bell chief executive Andy Bell commented: “The FCA’s focus should be on making sure advice is tailored to the pension saver and delivered in a form that they can understand. Banning contingent charging swaps one set of problems for another and doesn’t get to the heart of the issue. Most importantly, DB transfers will now become an option only available to the wealthy.
“Covid-19 will see the failure of businesses, which in turn will weaken or bring down final salary pension schemes. Members of defined benefit schemes, no matter how wealthy, should be allowed to access their right to transfer.”