Response to the FCA's proposal to ban contingent charging
30 Jul 2019
Ryan Markham, Head of Member Options at Hymans Robertson responds to the FCA’s proposal to ban contingent charging on DB-DC transfer advice:
“By proposing a ban on contingent charging in all but limited circumstances, the FCA has taken a big step towards further protecting consumers from accessing and acting on poor quality advice. Although contingent charging can be helpful in allowing consumers to access financial advice that they might not otherwise be able to afford, in its crudest form it means some advisers only get paid if they recommend a transfer value. Under this approach it is hard to understand how the advice can be truly ‘independent’ and in the best interests of consumers. As well as giving greater transparency to advice recommendations, banning contingent pricing models like this would help restore some confidence in the advice market.
“This proposal is likely to be disruptive for the adviser community – as well as requiring fundamental changes in commercial models, advice processes and disclosure requirements will also need to change. As a result of this, in the short term at least we are likely to see a shrinking the pool of advisers which operate in the DB to DC space. The proposals are also likely to create a reluctance for members to take advice if they have to meet upfront costs directly regardless of the advice outcome. This feels a particular barrier for members who don’t meet the limited FCA circumstances where contingent charging could still apply but who ultimately can’t afford the upfront costs of advice. We’d hate to see a situation where these lower income individuals who potentially have the greatest need for advice fall through the cracks. The issue therefore needs full debate with real focus on how the availability, costs and quality of advice will be impacted if contingent charging is banned.
“The FCA is also proposing introducing lighter touch advice where the recommendation is to stay in the DB scheme. In doing this, the FCA seems to be recognising the current challenges advisers are facing around being able to undertake triage services to filter out members for whom a transfer would not make sense. However, this lighter touch advice will still require a detailed understanding of the member’s personal circumstances as well as preparing a written recommendation report. How much less work this is for advisers (and therefore less cost for members) is therefore open to debate.
“Although the FCA is proposing increased and improved disclosure to members around ongoing advice and product charges, the conflict for advisers in relation to this hugely valuable ongoing revenue stream won’t go away completely. Proportionate ongoing advice, with transparency around charges will be key to protecting member outcomes over the long term – anything that can be done to better inform consumers of the value and cost of ongoing advice is welcome.”
“More generally any move away from contingent pricing means that more needs to be done to educate members on the value of financial advice, regardless of that advice recommendation. For example, a recommendation that ‘staying in the scheme’ makes the best financial sense is worth a cost for the peace of mind it can bring. We remain strong advocates of trustees and sponsors facilitating quality financial advice for their members. A ban on contingent charging makes the business case here even more compelling. Through facilitating financial advice, trustees and sponsors can ensure members have access to quality advice which is priced transparently and delivered affordably to members through economies of scale. This approach can ultimately help deliver better member outcomes.”