FCA contingency charging ban receives mixed industry response

The newly announced Financial Conduct Authority (FCA) ban on defined benefit (DB) transfer advice contingency charging has received a mixed response from the pensions industry.

While some have welcomed the ban, saying that it will increase the quality of DB transfer advice, others have warned that it may discourage savers from taking guidance.

“The Pensions and Lifetime Savings Association (PLSA) has consistently called for a ban on contingent charging,” began PLSA policy lead: master trusts, Craig Rimmer. “With its model of only paying the adviser if the pensions transfer goes ahead, contingent charging has been a perverse incentive that has resulted in far too many unsuitable DB transfers happening.

“We are pleased to see the FCA’s new package of measures to address the issues around advice for DB transfers and believe this is an important step to ensuring savers are given the best chance of achieving a good income in retirement.”

Interactive Investor head of personal finance, Moira O’Neill, echoed this sentiment: “The ban on contingent charging, is hugely welcome.

“It was always ludicrous to have a system in place where the regulator rightly insisted that people should seek professional financial advice if they are thinking of transferring any safeguarded benefits worth more than £30,000, but then to only pay for that advice if a transfer proceeded.”

Despite the positives, some have argued that the ban may have unintended negative consequences.

“The FCA’s decision to ban contingent charging is no surprise but runs the real risk of further reducing access to advice on DB transfers at a time when the coronavirus pandemic arguably means for some individuals, this is needed more than ever,” warned Aegon pensions director, Steven Cameron.

“Some individuals simply can’t afford to pay upfront, even where transferring might have been in their interests, and with advice legally required ahead of transferring, the ban means some will be unable to explore their statutory right to transfer.”

AJ Bell chief executive, Andy Bell, stated that the FCA’s focus should be on making sure advice is tailored to the pension saver and delivered in a form that they can understand, rather than on banning contingent charging.

“Banning contingent charging swaps one set of problems for another and doesn’t get to the heart of the issue,” he added. “Most importantly, DB transfers will now become an option only available to the wealthy.

“DB advice rules need a root and branch overhaul. Too much of the advice process involves trying to work out whether the transfer value on offer is good value for money.

“Frankly, this is a waste of time as there is an obligation on the ceding scheme actuary to certify that the transfer value fairly reflects the defined benefits being given up.”

Dalriada Trustees director, Brian Spence, concluded that although the firm was “very pleased” to see the FCA ban contingent charging, people must remain wary.

He commented: “Contingent charging has created conditions that have damaged the financial wellbeing of many DB scheme members in retirement. The existence of an incentive that rewards the adviser only if the member transfers is clearly dysfunctional and we are very pleased to see the FCA ban contingent charging.

“The ban will not deter the unscrupulous and so consumers and pension scheme trustees must remain vigilant and be on the lookout for pension scams, especially in the current environment.”

While the FCA's announcement seeks to "remove any potential bias" from the advice process, it also highlights the "urgency that’s needed to tackle the barriers to financial advice", according to Scottish Widows head of policy, Pete Glancy.

He continued: "We believe the key focus now needs to be on helping those who cannot afford to pay for financial advice, and are not financially sophisticated enough to be able to make complex decisions with confidence.

“The ban on contingent charging will have a big impact on the DB advice market – we could see some firms exit the market and others consolidate."

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