The FCA’s proposing a ban on contingent charging (CC) as they believe it could be creating a conflict of interest for advisers. In CC, pension transfer specialists (PTS) provide advice on pension transfers, but they only receive remuneration if the transfer goes ahead. The advice fee is generally taken from the product transferred into. There are a few variations of this, such as a small fee for the advice, but a much larger fee for transacting the business. But the FCA isn’t distinguishing between the two at the moment, and the ban would apply to all forms if it goes ahead.
The FCA hasn’t found definitive evidence that CC is linked to poor customer outcomes, and believes this is very difficult to prove. However, with mounting pressure from bodies such as the Work and Pensions Committee, it’s likely that the ban will go ahead.
From their data collection findings (referred to as thematic reviews DB1, DB2 & DB3) when CC is used, the average initial advice charge ranged from £7,000 to £10,500 - but in a purely fee based model, it ranged from £2,500 to £3,500. The increased initial fee in the CC model will impact the long term growth of the plan. It’s not clear from the consultation paper (CP) whether the £2,500 - £3,500 was for advice only or also covered implementing the transfer which is included in the CC.
The FCA’s proposing a “carve-out” to any ban on CC for specific categories of client. This means that a small minority of customers can still be charged on a contingent basis. These include customers with limited life expectancy, and those experiencing significant financial hardship. The bar for each of these categories will be pretty high and is unlikely to apply to most people. What’s more, the ban on CC is only being proposed for pension transfer business.
- The FCA acknowledge that the likely outcome of this is a reduction in access to advice and fewer transfers, but feel that this is an acceptable price to pay to achieve the outcome. To help with this issue, the FCA proposes to introduce a light version of advice called ‘abridged advice’. They expect this will be more affordable and the client must be informed at outset that the only possible outcomes are: For the pension transfer specialist (PTS) to advise the transfer’s not suitable, or
- The PTS can’t make a decision without providing full advice.
The advice will still have to be given by a PTS, with a full fact find, assessment of attitude to risk, assessment of attitude to transfer risk and capacity for loss. If the advice is not to transfer, the client can’t use this as evidence of having taken advice to then proceed on an insistent basis. But an appropriate pension transfer analysis (APTA) or transfer value comparator (TVC) isn’t needed which will further reduce time and cost of providing abridged advice.
So, won’t advisers just find a way around the CC ban, maybe by charging a token amount for advice and then a big charge for implementing the recommendation? The FCA has thought about this and proposes the following rules to prevent what it refers to as “gaming” the CC ban:
- No offsetting other work they do for the client against pension transfer cost
- Not charging less for pension transfer advice than they would for advice on a non-pension transfer case
- Not charging more on an ongoing basis than they would for a non-pension transfer case
- Must charge for advice where any service related to full advice has been undertaken. For example, APTA or TVC