On 26 March, the Financial Conduct Authority (FCA) released a further consultation paper – CP18/7: Improving the quality of pension transfer advice – which sought out views on whether the regulator should intervene in relation to charging structures. This could include a ban on contingent charging to address the difficulty in managing conflicts of interest that exist in providing pension transfer advice.
As you may be aware, contingent charging is thought by some to create a potential conflict of interest, where an adviser may be more likely to give advice to transfer even where this is not in the best interests of the client.
Rather than using a contingent charging model, an adviser could ask the client to pay a fee upfront, before they carry out the work and before the suitability of a transfer is known. Some, however, would argue that even when an upfront fee is paid, a potential conflict of interest still exists, as the transfer of funds would result in additional advice fees and funds under management, generating further ongoing advice fees.
With the FCA currently focusing on how contingent charging may determine the quality of advice delivered to customers, the New Model Business Academy (NMBA) recently asked our members: “Do you believe a ban on contingent charging would improve the quality of pension transfer advice?”
Almost three-quarters (72%) of our membership answered ‘No’, with 28% reckoning a ban would make a difference. Notably, we had an overwhelming response to this quick vote, and more comments than ever before, which demonstrates this is something about which our members feel very strongly.
We received a number of comments stating a conflict always exists due to the potential of funds under management post-transfer. As such, the argument ran, a ban would make no difference to the quality of advice given to customers and the ‘bad advisers’ out there would still give bad advice. One commenter said: “The FCA views this as a simple, headline-grabbing step to show they have done something regarding mis-selling.”
They added: “Restricting how already over-regulated firms that play by the rules can operate will simply reduce the numbers of legitimate advisers willing to operate in this area, creating further barriers to advice for retail clients, while doing nothing to deter those who aim to mis-sell.” A high number of our survey respondents felt it was not the place of the FCA to dictate the charging model advisers must follow.
Others believed the only way to improve the quality of advice in respect of defined benefit transfers was to increase the level of qualification required to give advice on this area. Although the current level of education to hold the licence is diploma level with additional higher level specialist exams, we received some comments that only chartered advisers should be able to give advice on this specialist area.
Others commented the only way to improve advice was for the regulator to offer more support through education, supervision and proactive checks. Many also mentioned the FCA in their comments, in the context of calling for further clarity on ‘what it sees as sensible justification to transfer’, as a better way to improve advice quality.
Barrier to advice
The overarching theme among the responses we received was this ban would create a barrier and reduce many people’s access to advice, as many clients do not have the available funds outside their pension to be able to pay an upfront fee.
Many agreed the best scenario could be an hourly rate or small upfront cost to cover the advisers’ time in ‘screening’ the client, followed by a full fee paid upon a transfer. A majority of respondents, however, felt this was unrealistic as the adviser needs to make a profit and not just cover time costs, and a lot of clients would not be prepared to pay even a small fee. On the other hand, a couple did suggest a ban on contingent charging could reduce the number of insistent clients.
A few responded to say they believe most advisers only ever act in the interest of their client, and that they themselves charge on a contingent basis but never advise a client to transfer if that is not the best course of action.
One also commented that “In an industry where we are supposed to be professionals, we should be trusted to be professional” – before raising the possibility some may feel moved to advise against a transfer, which could be in the client’s best interest, to avoid the liability that may arise from the alternative.
Tom Hegarty is managing director at The New Model Business Academy