A slim majority of advisers at this year’s New Model Adviser® Conference and Awards opposed an outright ban on contingent charging on pension transfer advice, despite warnings it poses a conflict of interest.
When polled at the event 54% of advisers said there should not be any ban on contingent charging for defined benefit (DB) transfer advice, with 46% supporting a ban.
Contingent charging, when applied to DB transfers, is where a client does not pay for advice unless they decide to go ahead with the transfer. However this is paid for, whether flat fee or percentage of assets, it means the adviser has a financial incentive to make a positive recommendation to transfer.
In 2016 compliance consultant Rory Percival said advisers ought to abandon contingent charging on DB transfers.
‘In the long term I think it would be good if there was a greater move towards non-contingent charging,’ Percival said. ‘I think this is a key element of the move towards being a genuine profession that is selling advice.'
While it has not banned contingent charging the Financial Conduct Authority’s (FCA) position is that it presents a risk that advisers need to carefully manage. It set its position out in the retail distribution review and in a 2013 thematic report.
Speaking to New Model Adviser® in July, FCA director of policy David Geale said while contingent charging reflects how some consumers want to engage with advisers, ‘we do know that for consumers, this is always a higher risk approach than a time cost model, for instance, because of the potential conflicts of interest.’
He added: 'Where firms operate a contingent charging model, they should have the proper controls in place to make sure this doesn’t negatively impact consumers.'
New Model Adviser® asked IFAs at the conference about their attitude to contingent charging.
Tim Geoghegan, director of Fareham-based G&C Financial Services, said he opposed a ban on contingent charging because it would make advice unaffordable for many people who needed it.
But he did agree that ‘excessive’ charging for DB transfers was not appropriate.
‘A lot of people are having to make quite important decisions on their DB schemes. For instance, some of those people in South Wales (members of the British Steel Pension Scheme who had a deadline to decide whether or not to transfer their pensions) need access to some appropriate advice, but if they had to pay a large upfront fee they would not take any advice.
‘The danger then is they are trapped into a decision they are making on an uninformed basis and that actually could be against their own interests. Contingent pricing is a clash of interests. But it is possible to manage that with full disclosure and a sense of professionalism.’
Owen Reid, IFA at East Sussex-based Prosperity IFA, also did not think the FCA should ban contingent charging but said ‘something has to be done’. However, he said contingent charging would be difficult to justify to some clients. He said clients could see there was not much more work involved processing a recommendation to transfer compared with the work that lies behind a recommendation not to transfer.
UPDATE: The same poll was conducted on Twitter following publication of this story, and the result was 64% in favour of banning contingent charging.
We discussed contingent charging and DB transfers with two advisers, Steve Buttercase and Anna Sofat, in an episode of our podcast recorded during last week's conference.