FCA proposes banning contingent charging on DB to DC transfers

The Financial Conduct Authority has proposed banning contingent charging by advisers on defined benefit to defined contribution transfers.

Publishing its consultation, Pension transfer advice: contingent charging and other proposed changes, today, 30 July 2019, the FCA proposed a number of measures to change how advisers manage and deliver pension transfer advice.

As well as banning contingent charging, the FCA proposed limiting firms’ ability to recommended transfers that incur unnecessarily high ongoing adviser and product charges. In some cases this can be for 20-30 years after the transfer.

It wants the advisers to empower consumers to make better decisions by improving how charges are disclosed and requiring checks on consumers’ understanding as part of the advice process. Under the proposals, the FCA will also be introducing “continuing professional development specific to pension transfer advice”.

The FCA also wants to establish new data collections from advice firms to improve its ability to regulate the sector. It also proposes amending technical areas of its rules and guidance to clarify and extend existing requirements.

The FCA referenced its research that found that 69 per cent of consumers are advised transfer despite its view that most customers would be best advised not to transfer. The FCA estimates that the harm created by unsuitable DB transfer advice is up to £2bn each year.

Commenting, FCA executive director of strategy and competition, Christopher Woolard said: “The FCA’s supervisory work has revealed continued problems in the pensions transfer advice market. By making changes to the way advisers are paid for transfer advice and the other changes to transfer advice we are proposing today, we want to ensure people receive suitable advice and drive down the number giving up valuable defined benefit pensions when it is not in their interests to do so.”

“As well as addressing contingent charging, the FCA is consulting on other measures to change how advisers manage and deliver pension transfer advice. These include introducing abridged advice so that firms can deliver low cost advice to customers who should not transfer, improving how charges are disclosed and setting out how advisers should demonstrate customers’ understanding of the advice.”

The issue of contingent charging was brought to light following the scandal with members of the British Steel Pension Scheme where it was found that some advisers had given inappropriate advice to transfer out, whilst operating a contingent charging structure.
The Work and Pensions Committee later launched an inquiry into contingent charging and suggested that the practice should be banned.

Commenting on the proposal, Hargreaves Lansdown, senior analyst, Nathan Long said it was a “sensible” suggestion.

“The challenge will be in making sure those for whom it could make sense have access to advice. This type of specialist advice is very complex and tends not to be cheap, which is why the FCA are considering an advice-light service to help people understand if even taking further advice would be worthwhile. It’s telling that the regulator is also focusing on people being defaulted into advice services that don’t offer value for money, as most people only really need advice at the point their finances become too complex for them.”

However, Aegon pensions director, Steven Cameron noted that the market is divided on whether banning contingent charging is a good idea.

“The FCA has recognised that while contingent charging can create conflicts of interest, an outright ban could widen the advice gap. The development of an abridged form of advice will allow customers to be advised when it is not in their interests to transfer without incurring the higher costs of full advice.

“We very much welcome this and it will now be important to think through the practicalities so this is as effective as possible. This should reduce the need for contingent charging. We also welcome the carve outs which will allow advisers to continue to offer a contingent charging approach to those with specific medical conditions which reduce their life expectancy or in significant financial difficulties. It will be important to ensure these carve outs are clear and workable.”

The FCA consultation will run until 30 October 2019.

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