The budding PTS population with an eye on current affairs will be aware of the sharp regulatory focus that currently surrounds contingent charging.
For the uninitiated, a contingent charge is one where the adviser is only remunerated, or only fully remunerated, if the proposed transfer goes ahead. The adviser’s fee is therefore ‘contingent’ on the client agreeing or deciding to give up the security of their defined benefit entitlement.
The difficulties inherent in this situation are obvious. In PS18/6, the Financial Conduct Authority (FCA) announced that it was to abandon plans to drop the “unsuitable” starting assumption for defined benefit transfers. The rationale was that recent supervisory work had shown significant evidence of unsuitable advice being given and significant potential for detriment as a result. In this context, therefore, contingent charging effectively means that the starting assumption is that the adviser will not be paid for what may be a significant amount of hard work.
In borderline cases, the temptation is therefore inherent, as is the conflict of interests. Is there a way that this piece of business can be allowed to proceed in a way that will a) get it past compliance and b) stand up to scrutiny in the event of a complaint? In his wonderful recent article (https://www.linkedin.com/pulse/insistent-client-defined-benefit-disaster-mcconnell-fpfs-cert-smp/) Dave McConnell FPFS made the very valid point that a number of advisers are using the insistent client get-out on a regular basis. As Dave points out, the majority of clients are not financially literate enough to make an educated decision to go against professional advice. Whilst the current climate of pension freedoms and huge transfer values makes the temptations obvious, the masses often need to be saved from themselves. This is particularly a concern in view of the ‘everyone else is doing it’ mentality which he quite rightly highlights.
As the FCA pointed out in its follow up, CP18/7, some firms that advise exclusively on pension transfers have the purest form of contingent charging model, which is entirely dependent on a proportion of clients transferring. Such a business would therefore not be financially viable if it did not recommend a minimum number of transfers each year.
Empirical proof of the link between contingent charging and unsuitable advice can be hard to come by. However, the logic is evident and the Work & Pensions Select Committee (WPSC), Financial Ombudsman Service (FOS), several PI insurers and numerous respondents to CP17/16 have identified it as a risk factor.
Contingent charging as a strategy could be considered to address some of the other concerns raised by the FCA in CP18/7. Specifically, the temptation for advisers firms providing a ‘triage’ service to inadvertently stray into the realms of providing advice whilst attempting to identify, at any early stage, those for whom a transfer would be unlikely to be suitable.
In addition, it does provide a solution of sorts to the behaviourial finance issues. Namely, the reluctance of layman clients to pay for a service for which there may be no tangible outcome. The financially unsophisticated often view money paid for advice not to transfer as money wasted, a problem which is aggravated by current legislation not allowing use of the Pensions Advice Allowance on a defined benefit scheme.
Contingent charging offers a solution of sorts. However, principle 8 requires firms to take due care to manage conflicts of interest fairly and it is difficult to see how a situation which offers such an inherent conflict of interests can be consistent with the principles of TCF. The practice came under sharp attack again in the aftermath of the British Steel crisis, which saw the WPSC report call for an outright ban and blast The Pensions Regulator as ‘fiddling while Rome burns’.
The FCA has also proposed in CP18/7 that the rules should require an adviser to provide a suitability report where a negative recommendation, i.e. one not to transfer, is made. Whilst this is entirely logical, in the context of contingent charging, it raises the interesting spectre of an adviser being liable to a FOS complaint for the advice, despite not having received a fee for it. Picture the scenario. John Smith, 65, divorced, is offered a million pound transfer value at retirement and is advised to keep the funds in his DB scheme. John passes away the next year, leaving his estate with nothing and his children, James and Jane, fuming. As they used to say on Bullseye: ‘here’s what you could have won’. It’s not stretching things too far to suggest that the adviser who made the ‘remain’ recommendation is likely to be the first target of their ire. The net result is likely to be advisers shying away from touching any client where there is not clear reason at outset to believe a transfer recommendation will be made.
The consultation period for CP18/7 is now closed and it will be an interesting time when the FCA comes back with its initial views. No less a judge than former FCA technical specialist and renowned transfer expert Rory Percival believes an outright ban is unlikely, primarily due to access to advice concerns (those of you who are interested can read Mr Percival’s take here: https://www.ftadviser.com/pensions/2018/04/30/fca-expected-not-to-impose-ban-on-contingent-charging/. Nonetheless, measures are likely to be proposed and it is an issue which is likely to remain high on the regulator’s agenda for the foreseeable future. Watch this space…
Andrew Houghton FPFS