Rachel Vahey: ‘Knee-jerk’ contingent charge ban could harm consumers

Rachel Vahey takes a look at the FCA's ban on DB transfer contingent charging in her latest feature for Retirement Planner and argues it may do more harm than good.

Lockdown has meant a relatively quiet spell for regulator declarations and consultations.

But that peace was shattered at the beginning of June with the publication of the Financial Conduct Authority’s (FCA) latest thoughts and actions on defined benefit transfers.

The ban on contingent charging grabbed the headlines. From 1 October 2020 contingent charging for defined benefit transfers and conversions will be banned except for specific groups of consumers with certain identifiable circumstances. Except for these cases, the ban requires firms to charge the same amount for advice on pension transfers whether or not the advice results in a recommendation to transfer.

This ends a period of several years where the FCA has danced around this issue deliberating whether a ban would improve the situation in the face of polarised opinion from the industry and others.

In the end, it came down on the side of a ban. Its reasoning being there is a clear conflict of interest in charging on a contingent basis, and that it would be effective in reducing the number of consumers getting unsuitable advice.

Cross-subsidy fears

One of its concerns was advisers ‘gaming the system’. It was worried vertically-integrated firms may cross-subsidise charges for pension transfer advice with product charges, and undercut other advice firms due to their business model. But the FCA considers its existing rules and the rules implementing the contingent charging ban prevent these.

There are some carve outs to the rules though, which the FCA believes will help most (but it admits not all) consumers who might benefit from a transfer and who otherwise find it difficult to afford advice.

These exceptions – that can continue to be advised on a contingent basis – include those in serious ill-health (clients can self-evidence this, there is no requirement for a doctor to be involved), and those who are in serious financial difficulty (who don’t have the means to pay for advice, or would be forced into debt by doing so).

One of the biggest arguments against the FCA’s ban was the effect this would have on those who don’t have the surplus funds to pay for transfer advice but who will benefit from transferring. The FCA’s counterargument is that most consumers will not be harmed by remaining in their existing DB scheme, and the carve-outs mean only a small number of consumers who are likely to benefit from a transfer but cannot afford advice.

However, these new rules have been mulled over in periods of relative calm.

The Covid-19 outbreak will dramatically affect the UK’s financial position for many years, if not decades. Many businesses will fail, which will, in turn, weaken or bring down final salary schemes. The decision about whether to transfer or not will take on a new facet.

And members of defined benefit schemes, no matter how wealthy, should be allowed to access their right to transfer.

We all want to see an industry that performs effectively, and both helps and protects consumers. But a knee-jerk reaction to banning contingent charging may not be the way forward.

Rachel Vahey is senior technical consultant at AJ Bell