Contingent charging ban would exacerbate advice gap, MPs warned

The Work and Pensions Select Committee believes the charging structure should be banned for DB pension transfer advice.

Rozi Jones
8th January 2019
Houses house of parliament commons government govt gov
"Contingent charging can create conflicts of interest, but an outright ban should be a last resort option as it will exacerbate the advice gap."

The pensions industry has warned that a ban on contingent charging should only be introduced as a last resort as it would exacerbate the advice gap.

The Work and Pensions Select Committee opened an inquiry into contingent charges after receiving 'worrying evidence' about the financial advice given to members of the British Steel DB pension scheme.

The Committee raised concerns that advisers were incentivised to suggest a DB transfer due to contingent charging fees which pay an adviser much more if their clients decides to transfer.

The Committee said the charging structure should be banned for defined benefit pension transfer advice, estimating that over 100,000 people a year are taking a DB transfer on the back of potentially bad advice.

The FCA decided not to introduce a ban on contingent charging in October 2018 but said it would "carry out further analysis of the issues”. In particular, the regulator said there was a lack of evidence linking contingent charging to unsuitable advice and bad outcomes.

Steven Cameron, pensions director at Aegon, said "regulatory policy shouldn’t be based on stamping out isolated instances of bad practice, particularly if this could constrain how the vast majority of professional advisers serve their clients".

He added: “We urge the Select Committee to keep an open mind in its inquiry into contingent charges for defined benefit transfer advice. Contingent charging can create conflicts of interest, but an outright ban should be a last resort option as it will exacerbate the advice gap.

“The first step should be to explore if the specific conflicts around DB transfer advice can be managed effectively. The heightened profile of DB transfer advice suitability should in itself reduce the likelihood of ‘bias’ towards advising to transfer. Furthermore, compliance departments and checks undertaken by pension transfer specialist provide further safety measures.

“Advisers and their clients should have a range of means of paying for advice, provided these do not present unmanaged risks of unsuitable advice. Some individuals prefer to pay for advice on a contingent basis rather than ‘upfront’ and it would be unfortunate if this group found themselves barred from considering transferring.”

Frank Field MP, Chair of the Committee, commented: “The FCA has confirmed to me that it shares many of the Committee’s concerns about the scourge of contingent charging. But to tackle this, and to protect consumers from the vultures circling around their pension pots, it needs more proof of what is really happening to people.

"It has explained to me the complexities of contingent charging, and how it needs to carefully consider its possible interventions so as not to cause unintended harm, particularly to vulnerable customers. The FCA has said it would welcome the Committee’s help to find out more, and we’ll be happy to do everything we can to make sure we get the right safeguards in place.”

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