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FCA to impose contingent charging ban over fears of ‘unsuitable advice’

30 July 2019

The FCA has proposed a ban on contingent charging for defined benefit transfers in a bid to stop consumers receiving unsuitable advice.

In its latest consultation paper, the regulator warned it fears too many advisers are delivering poor advice, driven by conflicts of interest in the way they are paid. According to the findings, the harm created by unsuitable DB transfer advice could cost as much as £2bn each year.

Most consumers are currently advised on a contingent charging basis, with 69% of consumers advised to transfer despite the FCA believing that many of the transfers that have taken place will not have been in the consumer’s best interest.

As a result, the watchdog has proposed that contingent charging is banned, except for specific groups of consumers with “certain identifiable circumstances” such as ill-health or serious financial difficulty. In the minority of cases where contingent charging is allowed, advice firms will have to charge the same amount for advice to transfer as they charge for non-contingent advice.

The FCA is also recommending a short form of advice, which will act as a new mechanism to filter out those consumers for whom a pension transfer or conversion is unlikely to be suitable, before they pay for full advice.

The FCA previously consulted on contingent charging last year but decided against a ban in October, stating that it would need to carry out further analysis. However, in its latest consultation, it said it found the current situation “unsustainable” and said the high level of unsuitable advice was not only damaging to consumers, but to firms with PII costs continuing to increase.

Andrew Tully, technical director at Canada Life, warned that measures must not prevent people from making the most of the pension freedoms.

He said: “It is almost impossible to show a link between contingent charging and unsuitable advice. But advisers only being paid if a transfer proceeds creates a conflict of interest and a perception they may be more inclined to recommend a transfer.

“While it is right we have strong controls and scrutiny of transfers, we need to be careful not to demonise all transfers and those involved in them. Otherwise we run the risk of stopping people exercising control over their pension savings and preventing some from achieving the best outcome.”

Steve Webb, director of policy at Royal London, said of the FCA’s proposals: “It is vital that the consumer comes first when it comes to the rules around DB transfers. Some of the FCA’s proposed changes will help to reduce the risk of consumers transferring into poor value destinations for decades after a transfer and are to be welcomed.

He added: “But if contingent charging is to be banned, the FCA and the Government need to find new ways of making transfer advice affordable and available.  If the FCA does not have the power to enable people to claim advice costs out of their DB pension rights then the Government needs to legislate to make this a right.  Consumers should also have a right to a partial DB transfer to reduce the all-or-nothing nature of too many transfers.   Until now, FCA actions have reduced the supply of DB transfer advice and raised the cost, driving some high quality advisers with unblemished records out of the market altogether. This has to change.”

AJ Bell’s Tom Selby pointed out that by banning contingent charging “the regulator will make it more difficult for those with large pensions but on lower incomes to pay for advice.

He added: “Ironically, the FCA’s most significant intervention in the DB transfer advice market comes as the number of people transferring out begins to fall.”

Kay Ingram, director of Public Policy at LEBC Group, which has been campaigning to outlaw contingent charging as a practice, said: “Those who opposed the ban have said that it could cause hardship to those who cannot genuinely afford to pay for advice. We have always believed that other solutions could be found for that minority of cases where a transfer is in the interests of the consumer, and we feel that the FCA has risen to this challenge by creating exceptions for those with severe debt or health problems.

“We would also like to see greater use of tax-free employer sponsored advice and the compulsion of pension providers to facilitate the payment of the Pensions Advice Allowance, which they have been slow to adopt voluntarily.”

A ban on contingent charging is among a number of remedies set out by the regulator, including a new requirement for advisers to show why the scheme they recommend clients transfer to is more suitable than their current workplace scheme and greater disclosure around the costs of advice.

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