‘A key driver of poor advice is contingent charging.’ This is now the official view of the Work and Pensions Committee, an influential group of MPs which ahs driven an inquiry into pension transfer mis-selling. The Committee has given all involved a hard ride, calling IFAs in for public questioning (though they failed to turn up, opting instead to air their argument with committee chair Frank Field via published correspondence) and putting the Financial Conduct Authority’s (FCA) feet to the fire.
We told you so. Well, we didn’t, compliance expert Rory Percival suggested it, not long after he left the FCA, where he was technical specialist.
In an interview with us in December 2016 Percival said that move towards non-contingent charging, was ‘a key element of the move towards being a genuine profession that is selling advice.’
The sentiment was echoed by other well-regarded advisers. Former Bloomsbury Wealth principal Jason Butler said contingent charring had ‘conflict of interest written all over it.’
Speaking to us last year he said in any arrangement where the adviser gets paid substantially more if the client transferred than if they did not, then ‘the law of common sense’ dictated that the business ‘is predicated on transferring people.’
Alistair Cunningham, director at Caterham-based Wingate Financial Planning, agreed. ‘If the advice is marginal, there is an incentive to tell someone to transfer when it may not be in their best interest.’
In October, just a couple of weeks after we published our report that unions were worried about advisers’ transfer approaches to workers, I wrote that contingent charging will only damage the reputation of advice in the long run. In fact the headline of my piece was ‘Advice will be judged on DB transfer charges.’ (You can read the article here.)
Now that is exactly what is happening, regardless of whether you agree with contingent charging or not.
My article was a reaction piece after EQ Investors’ chief executive John Spiers called for a cap on DB transfer fees; a sort of decency limit. Sure, his approach had its flaws. Great advice could very well justify a 1% fee of a transferred pot. But any move to dull an inbuilt incentive, to dampen the ability to collect huge financial rewards from a particular course of action, well that’s the new model way isn’t it?
But there has been substantial resistance among advisers to the idea of an outright ban on contingent charging.
At our conference in January I asked advisers whether the FCA should ban contingent charging on transfers: 54% said no.
The first comment on my aforementioned comment piece was from ‘Michael Faraday’ who said: ‘I'll stop contingent charging as soon as our regulator and our professional indemnity insurer does.’ Other comments were a bit more fleshed out.
Anthony Morrow argued that since conflicts of interest are already covered by FCA rules then it followed that any ban by the FCA would be tantamount to an admission its rules cannot be enforced. Surely not!
Last summer we were able to get the FCA to sit down with us and discuss DB transfers. The regulator’s director of policy David Geale reminded readers the FCA had set out its position in the retail distribution review and in a 2013 thematic report. He said while it was a ‘higher risk approach’ for firms, some may use it because it ‘reflects how some consumers want to engage with advisers.’
Therein lies the rub. The best defence of contingent charging is that without it many people would not be able to afford transfer advice at all.
If transfer advice is costly to provide then mandating that all people wishing to transfer with pots above a certain size must receive advice, as the government did in its pension freedom reforms, puts both adviser and member in an invidious position.
Transferring out surely is in the best interests of many people, so the question is how do we fund the provision of the best advice?
At the moment it is tough for those outside the profession to put a piece of paper between the models of high quality planning firms and murkier outfits when it comes to this specific issue.
In the transfers carried out by now ex-IFA Active Wealth (UK) (the firm that went into liquidation this week, which was the first to be told to stop DB transfers by the FCA, and which was a reincarnation of a previous firms with DB transfer related complaints against it) 90% of transfers were advised upon on an contingent charging basis. But, the firm’s director Darren Reynolds pointed out, client has the ‘freedom to select the payment method that he feels suits him best.'
I cannot help but view contingent charging as a gaping hole in the pension freedoms set-up. In the rushed consultation on whether members of private sector DB pensions should be given access to the freedoms, the government decided to maintain members’ right to transfer out ‘subject to additional and important safeguards.’
Impartial advice was one of these safeguards. But it was a job half done for BSPS members. It is a shame that the FCA, already aware of the conflicts of contingent charging, did not take that opportunity to reinforce its position. Faced with a choice between pricing members out of transfers and allowing an inbuilt temptation to mis-sell, it continued with simply saying the conflict needed to be managed.
The FCA estimates the cost of giving a personal recommendation on a DB transfer is £3,250. So it knows how much it costs, knows there is an in built conflict, and must know many DB members do not have the cash to pay for transfer advice despite the value locked up in their entitlement.
Contingent charging divides opinion among advisers, but the FCA can no longer sit on the fence. It will take contortions worthy of Harry Houdini to offer a solution that does not result in some losing out.