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 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.