Articles - Is contingent charging the root of all pension transfer evil

The debate on contingent charging for pension transfer advice refuses to go away, with one commentator branding it “the root of all transfer evil”, but is it really?The Work and Pension Committee (WPC) thinks so. Following their inquiry into charging structures for financial advice they announced they intend to push for a ban on contingent charging for pension transfers if the Financial Conduct Authority (FCA) does not act. Prior to that the FCA itself confirmed in its 2019/20 business plan that it is still considering whether a ban would be appropriate and will consult further on the subject in 2019.

 By Fiona Tait, Technical Director, Intelligent Pensions
 The case for a ban
 The WPC, and to some extent the FCA’s, case is that contingent charging creates “an inherent conflict of interest”, with advisers consciously or unconsciously leaning towards the option that would result in their being paid. Those for a ban, including many financial advisers, believe contingent charging was a key driver of the advice given to members of the British Steel Pension Scheme (BSPS) to transfer out and into a personal pension, instead of remaining in the scheme or transferring to the replacement BSPS 2 scheme.
 The case against a ban
 Supporters of the contingent charging model argue it makes advice more accessible. Taking payment from the pension funds of those who go ahead with a transfer allows them to offer a “free” analysis service to those who might otherwise be unable to afford it. In an environment where financial advice is mandatory for transfers above £30,000 this argument does have some weight.
 Moreover, they argue, a ban on contingent charging would not actually prevent the unsuitable advice identified by the regulator, and the FCA should focus on finding more effective ways of tackling this issue.
 Other arguments
 1. Fairness
 Most service industries relate their charges to work done per individual or firm. In other words, the person who benefits pays for the work carried out. While contingent charging is undoubtedly effective in mollifying those who resent being forced to take advice, it is less clear if those who do go ahead realise that they are paying not just for their own advice but for others as well.
 2. Cashflow
 Relating charges to the work done rather than the number of positive recommendations to transfer is also advantageous for the cashflow of the advice firm, by ensuring payment is directly related to the time and resource spent on each customer. A well-run business should be based on certainty of payment, not a contingency.
 3. Value of advice
 Carrying out analysis of a defined benefit pension scheme is a long and complicated process and merits payment, regardless of whether a transfer is subsequently arranged. Offering this service “for free” totally devalues the worth of a service which is delivered by the most highly-qualified people in the industry.
 Would it work?
 There is little doubt in the regulator’s mind that advice on pension transfers does not meet the standards it expects. The question is, would a contingent charging ban make any difference, or would it be enough to simply make people more aware of the conflicts of interest?
 It is certainly true that a ban on contingent charging would not in itself prevent unsuitable advice, but no single solution would. Equally if the public were told in no uncertain terms of the conflict of interest that may be enough to prevent some harm but it would be difficult to do this in such a way that it doesn’t become just another unread clause in the Terms and Conditions.
 Opponents of the ban also state that it would simply lead to advisers “gamifying” the system in different ways, for example by reducing initial charges and raising ongoing fees. This suggests that we are still a long way from being a profession which offers transparent and comparable fees. Contingent charges are much harder to compare, since they are dependent on a factor which is specific to individual firms.
 The FCA have recently expressed dismay at the high proportion of positive recommendations made by some firms, up to 65% of those looked at in some cases. There are some valid reasons for this, however it does become much harder to argue so long as contingent charging is allowed to muddy the picture.
 My view, and that of many advice firms, is that the conflict of interest argument is valid and does little to promote the professional image most of us are trying to project. Contingent charging may not be the evil itself, but it is not unreasonable to state that it is part of the root cause.

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