18 arguments for & against DB contingent charging ban

New Model Adviser takes a look at responses to the work and pensions select committee's inquiry into contingent charging on defined benefit (DB) transfers

At the beginning of this year, the work and pensions select committee opened a new inquiry to look solely at contingent charging on defined benefit (DB) transfers.

The inquiry follows on the committee’s pension freedoms inquiry, which featured ‘worrying evidence’ about advice given to British Steel Pension Scheme (BSPS) members.

The committee asked for evidence considering contingent charging conflicts of interest, whether the charging structure increases the likelihood of unstuitable advice and suggested as to how conflicts around this could be resolved or prevented.

The majority of evidence received by MPs has been against a ban, but there are some making the case for ending contingent charging on transfers. 

We have collected some quick highlights to showcase the arguments being made for and against a ban. 

 

 

At the beginning of this year, the work and pensions select committee opened a new inquiry to look solely at contingent charging on defined benefit (DB) transfers.

The inquiry follows on the committee’s pension freedoms inquiry, which featured ‘worrying evidence’ about advice given to British Steel Pension Scheme (BSPS) members.

The committee asked for evidence considering contingent charging conflicts of interest, whether the charging structure increases the likelihood of unstuitable advice and suggested as to how conflicts around this could be resolved or prevented.

The majority of evidence received by MPs has been against a ban, but there are some making the case for ending contingent charging on transfers. 

We have collected some quick highlights to showcase the arguments being made for and against a ban. 

 

 

Against

The Personal Finance Society (PFS) said:

'We think that a ban would not address the committee’s concerns. Some clients – for example, clients with a terminal illness who may benefit from contingent charging – may find themselves in a more difficult position under a ban.

'Equally, firms will still face pressure from insistent clients to recommend a transfer.  In these cases, clients will often have already made the decision to transfer out, and simply be looking for an adviser to facilitate the transfer. The temptation in these circumstances...does not come from remuneration structures but from the difference between clients’ short- and long-term interests.'

Read our exclusive interview with PFS chief executive Keith Richards (pictured) here. 

For

National advice firm LEBC, whose chief executive is Jack McVitie (pictured) said: 

'We believe that the negative impacts of a ban on contingent charging are minimal and are outweighed by the positive effects. These include a greater likelihood that regulated advice is impartial, and a lowering of the cost of advice, with everyone seeking it paying their fair share. If this can be achieved, with a public better informed via financial education and guidance, before taking regulated financial advice, advice is likely to be more suitable and affordable.'

 

Against

Richard Caddy,  shift operations manager at British Steel in Teesside, and one of the former members of the British Steel Pension Scheme (BSPS), said: Although this inquiry is focused towards ‘contingent charging’ I do not believe that a ban would help solve the issue of poor advice. Instead, it would disadvantage the less wealthy consumers who are faced with a life changing decision, such as the members of the BSPS.'

He added: 'To improve the integrity [of transfer advice] would require a tighter regulation, and tougher penalties towards companies giving poor advice. This would also be beneficial towards the good advisers who instead see an occupation become tarnished from both poor advice and greed.’

 

For

The Pensions Advisory Service (TPAS) said: 'Contingent charging creates a clear conflict of interest that aligns incentives in favour of unsuitable advice.

'Triage could [provide] a breakdown of the factors that one should consider with respect to a defined benefit transfer... that an adviser is unable in an initial conversation.

'Default guidance from TPAS/Single Financial Guidance Body at the point a CETV is requested could help strengthen the integrity and efficiency of the process by making customers more informed and reducing the number of cases that go on to advice.'

Against

National advice firm Quilter said: ‘We feel strongly that contingent charging can work safely and is in the interests of consumers to ensure access to advice, and the desire to seek it, provided appropriate and effective controls are in place.

‘And, that we believe that a ban would be highly detrimental to consumers, as the complicated nature of this area of advice means the fees charged can be substantial.  For many consumers, this may deter, or even prevent, them from seeking advice at all on such a critical aspect of their retirement planning.’ 

Against

Bridgend-based advice firm Future Asset Management, which is run by managing partner David Wingar (pictured), said: 'Although we personally favour non-contingent charging, we believe that ensuring the quality and integrity of the industry would be far more important than any legislative rulings on charging structures. Having a strong industry should mean people can have access to good advice and allow the firms to build their charging structure to how they see fit.'

Against

The Incentive Exercises Monitoring Board (IEMB) a voluntary group originally set up in 2011 to monitor transfer incentives, said: 

'The IEMB “banned” contingent charging because we saw that rewarding advisers for results increased the likelihood of take up of the offer. Some advisers used take up rates as an indicator of success and as a marketing aid. 

'However, we recognise that a ban on contingent charging in the context of business-as-usual transfer advice is a different matter. Our view is that there is no place for charging for pre transfer advice that is contingent on a transfer taking place.'

For

Intelligent Pensions, which in 2017 voluntarily suspended its pension transfer permissions, said:

'Banning contingency charging would not remove all conflicts of interest, or all of the incentives for unscrupulous individuals to operate in this market, but it would reduce them.'

It added: 'We believe firmly in the principle that payment should be for work done. The preparation of a defined benefit transfer report is a lengthy process and should be paid for whatever the result.'

 

Against

PIMFA senior policy adviser Simon Harrington said:

‘The removal of contingent charging will not necessarily improve the quality of advice. 

‘We are concerned that the actions of a minority of errant advisers - or to use the work and pensions select committee terminology, ‘vultures’ - appear to colour the committee’s assessment of the advice industry in general. We would urge the committee to consider the civic good that advice plays going forward in its assessment of the industry.’

 

For

The Pensions and Lifetime Savings Association (PLSA) said: 

'The PLSA supports a ban on contingent charging because we believe that it does increase the likelihood of unsuitable advice.

'The Single Financial Guidance Body [could offer] triage services...to allow the consumers to work through whether they should be starting the transfer process or not. This could...saving costs for consumers and allowing advisers to concentrate on those consumers where the advice is likely to be most suitable.

'The pension advice allowance should also be revisited to help broaden access to affordable regulated financial advice.'

For more on the pension advice allowance click here. 

Against 

Provider Royal London said it was against a ban unless there is further evidence that contingent charging causes bad outcomes:

'The PI insurers have to ‘put their money where their mouth is’, and if they thought that advisers using contingent charging were giving advice that would be systematically open to later challenge they would simply refuse to provide cover.   Yet advisers who charge on a contingent basis are still operating and are still able to provide cover.  This is the clearest evidence that we have that charging on a contingent basis does not necessarily lead to poor advice.'

 

Against

St James’s Place said: 

'Given the prevalence of contingent charging in the market, this provides clear evidence that conflicts of interest can be, and indeed already are being, managed within firms across the broader industry.

'There is no evidence, therefore, that contingent charging models result in a higher likelihood of unsuitable advice. Before any conclusions around contingent charging are reached, further work on the suitability of advice in the wider market is required.'

Against

Graham MacAusland, a financial adviser at St James's Place partner firm St Edmunds Wealth Management said:

'In the past few years I have been involved in advising my clients on the suitability of transferring out of a number of their DB schemes and the risks of remaining.'

He added that he used an 'independent review' system to determine whether a transfer was suitable. 

'I have been able to dissuade several clients from transferring out of their DB schemes at a minimal cost to the client,' he said. 

'I accept that some DB schemes are so bad that clients need advice to confirm that they should bite the bullet and accept the cost of a transfer, but not before an independent review of the scheme.   The adviser can then decide if the contingent charge is worth the time that will be consumed providing regulated advice for a DB transfer.   If all advisers followed this system then there would be no concerns about contingent charging.'

Against

Kent-based IFA Chevening Finaical set out three solutions instead of a ban to contingent charging:

'1. Oblige DB Trustees to meet the costs of regulated Pension Transfer advice (via a Scheme Pays/Pension Debit approach as already used for AA charges) when the advice is to retain the DB scheme.

'2. Oblige DB schemes to permit Partial Transfers in all cases.

'3. Allow contingent charging only for the actual implementation of a transfer.'


 

Against

An IFA who chose to withold their name said: 'If you were to specify the fee that firms must charge (something the FCA is generally reluctant to do) then you risk setting the fee too low - in which case responsible advice firms may decide they cannot cover their costs and leave the unscrupulous advisers as the only ones providing advice in this area.

'Setting the level too high would put the advice beyond the reach of all but the wealthiest clients; a potentially regressive move that would further exacerbate the advice-gap we have in this country.'

 

Against

London-based Sapienter Wealth Management said:

'A strict ban, does not adequately respond. A discussion with the consumer to point out this conflict, perhaps with wording prescribed by the Regulator, would be sufficient.  The idea of introducing a regulation banning human action is antithetic to a free market economy. 

'The introduction of a mandated ‘triage’ service where for a negligible charge, the basic issues in such a transfer are outlined could be agreed on as benefitting both consumer and adviser' 

Against

London-based advice firm Fowler Drew said: 

'We believe the case for a ban, though intuitively compelling, is flawed in principle. We do not think that detriment having this cause has been demonstrated and we think it is actually somewhat implausible, compared with so many other reasons for poor practice or potential bias. A ban will probably reduce transfer activity but this carries a cost.'

 

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