Contingent Charging ban comes into force on October 1st.Go back
What is contingent charging and why has it been banned?
In a nutshell, contingent charging is when firms charge more for advice to transfer than advice not to transfer. The contingent charging model worked on the basis that financial advisers were only paid following the transfer of a client’s defined benefit pension as opposed to charging a client for pension advice upfront.
On one hand, some have argued that contingent charging worked as it allowed everyone ‘free’ pension advice without the worry of being charged. However, others argued that it created a conflict of interest as advisers only get paid if a pension transfer is conducted. The charges could also be extremely high, running into their thousands.
This conflict of interest meant that the FCA found advisers were delivering poor pension advice with 69% of consumers advised to transfer despite its view that most would be better off sticking with their existing scheme. They estimated that between 28,000 and 35,000 consumers received unsuitable advice between October 2017 and September 2018.
The average transfer value of all advised consumers in that period was £350,000 which meant that in just one year, up to £1.6bn to £2bn of pension pots could have been subjected to poor transfer advice. The FCA estimated that ongoing advice and product charges could on average consume around £77,000 of a £350,000 pension pot over typical retirement period.
What happens now
Back in June, following an inquiry, the FCA published new rules and guidance to include reducing the conflicts of interest created by current charging structures and enabling firms to give high-quality advice, creating a more sustainable market for the long term.
The ban will come into force on 1st October of this year, 2020 and will require firms to charge the same amount for advice on pension transfers and conversions irrespective of whether the advice results in a recommendation to transfer or not.
As qualified specialists, clients should not be paying for a transfer but for the detailed analysis undertaken to assess whether is in their best interest to make the life-changing decision of moving such high amounts of money.
This ban means that clients will now need to pay for pension advice on a defined benefit pension scheme.
The FCA has stated “Since the pension freedoms were introduced in 2015, we have regularly assessed the suitability of advice of firms advising on pension transfers. We have consistently found that levels of unsuitable advice are too high, given the obvious benefits of consumers remaining in DB schemes. This has serious consequences for consumers who may find themselves considerably worse off in retirement as a result.
We have intervened previously with rules designed to improve the quality of pension transfer advice to consumers, but we believe too many advisers are still giving poor advice. Our work shows that some advisers are unclear about what they need to take into account when giving advice. We are also concerned that charging structures create an obvious conflict of interest.”
APJ Solicitors have their say
The FCA rule change on Defined Benefit Pensions and their ban on contingent charging is something we have supported quite vocally for some time.
Defined Benefit Pensions have long been identified as a ‘gold standard’ Pension scheme, the majority of people should not be encouraged to move away from them as it is clearly not in their best interests. The volume of transfers that have taken place is quite staggering and the amount of advisers exiting the market as a result of the change underlines that perhaps these transfers took place more from a commercial standpoint than a best advice one.
Removing the potential conflict of interests from contingent charging for advice can only be a good thing in terms of increasing transparency and impartiality. It means that when people need advice they can be more sure that their advisor is working in their best interests rather than placing specific business because they are being paid to do so. It makes the fiduciary duty the advisor owes their client clearer.
APJ Solicitors are authorised and regulated by the Solicitors Regulation Authority under SRA 629443. ICO number APJ ZA188164.