Later Life

FCA bans contingent charging

The FCA says the ban on contingent charging will "reduce conflicts of interest" which arise where a financial adviser only gets paid if a transfer goes ahead.

Rozi Jones
|
5th June 2020
FCA new
"While much of the advice we looked at was suitable, we are still finding too many cases in which transfers were not in the customer’s best interests."

The FCA has banned contingent charging as part of a new package of measures to "address weaknesses" across the defined benefit (DB) pension advice market.

The FCA says the ban on contingent charging will "reduce conflicts of interest" which arise where a financial adviser only gets paid if a transfer goes ahead and will help "good advisers, who will often advise to stay put, to compete".

The FCA will implement the ban on contingent charging in most circumstances. Advisers must now consider an available workplace pension as a receiving scheme for a transfer and, if they recommend an alternative solution, demonstrate why that alternative is more suitable.

The FCA will also implement proposals allowing advisers to provide an abridged advice process which will help consumers access initial advice at a more affordable cost. The abridged process can only result in a recommendation not to transfer or a statement that it is unclear whether a consumer would benefit from a pension transfer without giving full advice.

To assist financial advisers giving transfer advice, the FCA has issued a Guidance Consultation designed to help advisers put in place better processes to ensure consumers get suitable advice. The guidance identifies good and poor practice and will help firms identify weaknesses in their existing advice processes.

The FCA has also published an update to its ongoing targeted supervisory work, looking at the advice firms have given to those seeking to transfer out of a DB scheme. This has involved an industry-wide data collection from over 3,000 firms. The FCA provided detailed feedback to over 1,600 of these firms and as a result over 700 gave up their permission to provide pension transfer advice.

In addition to this, the FCA conducted in-depth reviews of the 85 most active firms in the market, who were responsible for 43% of transfers between April 2015 and September 2018.

The FCA found that there has been an improvement in the suitability of advice given over time, with the suitability of advice rising from a low point of 47% in previous years to 60% in 2018. However, the FCA remains concerned at the number of files which either appeared to be unsuitable or where there were information gaps. The number of files where the advice appeared unsuitable was 17% and the FCA says this "remains unacceptably high".

The FCA is currently undertaking 30 enforcement investigations arising from concerns identified in the course of its programme of DB transfer work.

Christopher Woolard, interim chief executive of the FCA, said: "The proportion of customers who have been advised to transfer out of their DB pension is unacceptably high. While much of the advice we looked at was suitable, we are still finding too many cases in which transfers were not in the customer’s best interests.

"What we have set out today builds on the work we have been doing and reflects our determination to improve standards in this market. Customers need to have confidence that the advice they are receiving is right for them. The steps we are announcing today will drive up standards."

Steve Webb, partner at LCP, commented: “The current crisis could well lead to a surge in interest amongst the over 55s in accessing their DB pension. The need for affordable, high quality advice is likely to be greater than ever, and it is right to crack down on firms who have given poor quality advice.

"But forcing members to pay high upfront charges for advice will act as a barrier. For those who do find thousands of pounds up front for advice there a risk that they will then be determined to go ahead with the transfer even if it is not in their best interests. Successful regulation would have left members with a wide choice of quality independent advisers. Instead, poor conduct by some advisers and poor regulation means that the DB transfer advice market is simply not working.”

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