Industry split on contingent charging ban

The industry is split on its response to the FCA’s ban announced today on most contingent charging on DB pension transfer advice.

A number of critics have rounded on the FCA for reducing access to DB transfer advice at a time when the Coronavirus crisis could mean more people were considering transfers.

In its pension transfer review report published today the FCA accepted responses to its ban proposals had been “polarised.”

• Critic of the ban and former Pension Minister Steve Webb, a partner at consultants LCP, said forcing scheme members to pay pay high upfront charges for advice will act as a ‘barrier’ to people who need DB transfer advice.

He said: “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.”

He said poor conduct by some advisers and poor regulation means that the DB transfer advice market is “simply not working.”

• Andy Bell, chief executive at AJ Bell, and also a critic of the ban on contingent charging just swapped one problem for another.

He said: “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.  Banning contingent charging swaps one set of problems for another and doesn’t get to the heart of the issue.  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.” 

The PFS, an opponent of a contingent charging ban in the past, said many questions were raised by the FCA’s reforms. 

• Keith Richards, chief executive of the Personal Finance Society, said on the contingent charging ban: “We understand the perceptions of contingent charging by key stakeholders, such as the Department for Work & Pensions select committee, means that prescriptive regulatory action in this area may contribute to greater public trust in advice on pensions transfers. But we are concerned that the exception to ban contingent charging for ‘specific groups of customers with certain identifiable circumstances’ will put pressure on advisers to facilitate pension transfers in ambiguous situations.”

He said the plans for potentially lower cost ‘abridged advice’ were unlikely to be followed up by many firms due to the complexity of advice required on transfers.

He said: “Consumers will still need professional ongoing advice to manage their investments through retirement, and it is key that advisers are able to recommend a route for clients that allows them to continue to receive high quality advice.”

• Pete Glancy, head of policy at Scottish Widows, said: “While the FCA’s announcement today seeks to remove any potential bias from the advice process, it highlights the urgency that’s needed to tackle the barriers to financial advice. 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 Defined Benefit advice market – we could see some firms exit the market and others consolidate. Advisers looking to stay in the DB advice space may benefit from signing up to the Personal Finance Society’s Pension Transfer Gold Standard – it creates a point of differentiation, because making the effort to achieve this sends a clear signal that a firm will go the extra mile to do the right thing for its clients.”

• Steven Cameron, pensions director at Aegon, said the ban risks reducing access to much-needed advice on transfers during the current Coronavirus crisis.

He said: “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.”

“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.

“Clarification on those individuals eligible for ‘carve outs’ from the ban are welcome and we hope this may alleviate the issues for some individuals. We may see an increase in the number of individuals eligible on grounds of serious financial difficulty as a result of the financial implications of COVID-19. We also support a carve out for those with life shortening medical conditions and welcome the move to allow this to be self-certified rather than requiring specific evidence from a medical professional.

“However, on top of these new FCA requirements, the supply of advice on DB transfers is already under huge threat because of the increasing difficulty advisers face in obtaining Professional Indemnity Insurance. We hope the FCA will keep this under review and seek solutions to make sure the market can still operate.”

However, a number of key bodies have supported the ban.

• Hugh Savill, director of Conduct and Regulation at the Association of British Insurers, said: “The ban on contingent charging is welcome and what we called for. It is the right thing to do.”

“We welcome that exclusions are made for customers facing a shortened life expectancy or serious financial hardship. Some vulnerable customers who may benefit from a transfer and cannot afford financial advice up front may find the contingent charging model works best for them.”

• Craig Rimmer, policy lead on master trusts at the Pensions and Lifetime Savings Association, added: “The PLSA has consistently called for a ban on contingent charging. 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.

“With savers vulnerable to making hasty financial decisions during the uncertainty arising from the pandemic, our disappointment is that the ban is not happening even sooner. It would be better to raise the quality bar for pension transfer advice now rather than wait until 1 October.”