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DB schemes urged to fund advice to solve charging conundrum

As a New Model Adviser® poll reveals, advisers are split on pension transfer charging, Elliot Smith hears why letting savers pay for advice with their pension may be the answer

DB schemes urged to fund advice to solve charging conundrum

Advisers are still totally divided over whether to ban contingent charging on pension transfers, a New Model Adviser® poll has revealed. But calls are growing to allow members to pay for advice directly from their schemes.

Earlier this month New Model Adviser® polled delegates at our Conference and Awards, asking: Should the Financial Conduct Authority (FCA) ban contingent charging on pension transfers?

The result was 52% of delegates saying ‘no’ and opposing a ban while 48% voted ‘yes’ in favour of one. This was very similar to the results from the previous year's event. Asked the same question in January 2018, 54% of advisers said there should not be any ban.

The big reason not to ban contingent charging is doing so would immediately exclude whole swathes of DB scheme members from accessing advice.

Steve Bailey (pictured below), director of compliance consultancy ATEB, has seen hundreds of DB transfer cases, and believes a ban on contingent charging would be ‘like putting a plaster on a severed finger’. Instead, he says the regulatory focus should be on business models, not a particular charging structure, and a ban would unquestionably limit access to advice.

‘The key thing for me is the question of the business model of the firm the client goes to talk to,’ said Bailey. ‘What is their appetite for risk?

‘Do they have a business with a number of qualified advisers and cash in the bank, charge by the hour and can afford to be completely impartial to the outcome of the conversation? Not many firms in the UK fit that profile.

‘If you look at the business model of the alternative, as an extreme case, it’s a firm that goes chasing this type of business. As part of their projections, in order to pay their advisers, they’re actually working through a certain number of transfers in a month or a certain percentage of investment.’

By contrast, he explains, an established business with consistently strong profitability, minimal overheads and employed advisers exerts very little pressure on its staff to drum up transfer business.

Deeper problem

Adviser Al Rush, principal of Rutland-based Echelon Wealthcare, has spearheaded efforts to expose bad practice in South Wales and recover stranded pension funds.

But despite having seen some of the well-documented pitfalls of contingent models in his campaign for justice on behalf of steelworkers, Rush believes a ban would be ‘clumsy’. A ban on contingent charges, said Rush, would disadvantage many of those who might legitimately benefit from a transfer.

‘Abuse of contingent charging is the problem, not the use of contingent charging,’ he said. ‘Banning something because it’s creating a problem means the chances are you aren’t managing the risk sufficiently well in the first place, not that the problem is inherently bad.

‘We are seeing the same potential problem in the personal contract purchase (car finance) market. But, when you buy a car, you don’t pay the salesman with a fee, you happily pay by commission.’

Bailey added: ‘The problem is with the FCA-approved firms with pension transfer specialists. Does the FCA scrutinise business models? No, it doesn’t.

‘It might do it at outset, but if it is really serious, it should look at the business plan, and understand the firms giving advice. You could establish set criteria that firms would have to meet to advise in this area.’

He said it was pointless trying to  separate DB transfer charging structures from those used for other types of advice. Bailey observed contingent charging also exists in personal pension switches, investment switches and other fundamental aspects of advice.

‘The market is about 95% contingent across the board on everything,’ he said. ‘If you start changing it for pension transfers, does that mean you have to start changing it for investments and personal pensions? It is exactly the same principle.

‘Where does it end up? You’re trying to solve a problem that is down to unscrupulous people. That has to be tackled in a different way.’

Rush suggested addressing the ‘problem as well as the symptom’. He said: ‘Let’s introduce innovation such as videoing client meetings to verify the client is made correctly aware of the downsides. Let’s attach a two-person principle to checking transfer files before submission. Let’s punish financial service transgressors as ruthlessly as possible.

‘Let’s educate potential transferees properly before the event. Let’s introduce a “fair fee” principle. Let’s address the issue of indemnity and let’s compel pension providers in receipt of transfers to take on far more responsibility. Let’s meet the challenge and step up, not step down.’

Conflict of interest

Tom Wilcox-Jones (pictured above), managing director of Chester-based White Oak Financial Planning, believes there is an ‘inherent conflict of interest’ with defined benefit transfers in particular, which has been borne out by misselling situations such as the British Steel Pension Scheme.

He said while the vast majority of IFAs have ‘a perfectly fine moral compass, there are some who don’t’.

‘If IFAs can sit down and do 10-to-20 hours fully assessing whether someone should remain in a DB scheme for free, and say there isn’t added pressure to transfer, I’d be surprised,’ said Wilcox-Jones.

‘The charging structure is open to abuse,’ he said, adding the work involved deciding whether it is a suitable decision or not ‘is so in depth it can’t be contingent’.

Wilcox-Jones charges a fixed fee of £995 for the initial review and £3,000 for implementation (1% for a typical client) if he and the client agree to transfer.

Even when initial costs are covered, DB transfers are still a costly item of advice. But it also illustrates the large amount of extra work required if the recommendation goes ahead.

Read more on how to manage contingent charging conflicts of interest

Mandy Dale (pictured below), director of Bishop’s Stortford-based Hanbury Wealth, also advocates a fixed-fee approach.

‘You have to look at death benefits and the escalation rate. Everything has to be analysed,’ she said. ‘And if it’s at the back of your mind that you’ll only get a fee if you go ahead, human nature is bound to kick in.’

Greater flexibility

Members of defined contribution schemes can already access pension funds to pay for advice, albeit this is limited to £500 per year. Why should DB scheme members be denied the same facility, especially when the advice would be so valuable?

Both Dale and Wilcox-Jones said DB schemes ought to be able to facilitate adviser fees, but added it would be easier to pay a flat fee as a one-off charge.

Wilcox-Jones said: ‘If we look at the steelworkers, they have the pensions but they don’t necessarily have the funds available to pay an IFA £2,000 or whatever the IFA charges for an initial assessment.

‘How are they going to get advice? They are going to be pushed towards somebody who is charging on a contingent basis.

‘You should be able to pay for it out of the pension scheme regardless of whether you transfer or not. So the client could turn around to the pension scheme and say: “my fund is worth X, but if I pay Tom £2,000 to review it, I know it is going to reduce my income at 65 by X amount. I am willing to do that to discover whether I should transfer and take a cash equivalent transfer value”.’

Dale added: ‘There has to be a way DB schemes can accommodate a one-off explicit charge. I don’t think clients would be against the idea of that charge coming out of a £200,000-plus pot for the assurance they are doing the right thing by staying in the scheme.’

Although opinions differ on the practicalities, both sides agree a blanket ban without a workable alternative in place would cause unintended harm to the very people it is designed to help.

As Bailey summed up, MPs risk pressurising the regulator to ‘cut off its nose to spite its face’ by banning contingent charging and casting thousands of pension savers into the cold.

In 2014, ETVs were on the mind

It is worth remembering the consultation on whether to extend the pension freedoms to members of private DB schemes came at exactly the same time as a report on poor practice around enhanced transfer value exercises (ETVs).

ETVs are where a sponsoring employer offers scheme members an inflated cash value to encourage transfers out of the scheme. When it was suggested, by the Association of British Insurers (ABI) among others, that getting independent financial advice should be a pre-condition of transferring out, it was to a greater extent to protect members from being tempted out of schemes (in this context ‘independent’ meant ‘from the employer’ as much as in the regulatory sense).

If, the FCA said, the employer wants to run a transfer exercise, it needs to fund independent advice. There is no mention of contingent charging or even the affordability of transfer advice in either the FCA’s conclusions or the ABI’s submission.

The ABI’s one point, tellingly, is that ‘if it is member initiated, we believe it only fair that it should be at their expense. Otherwise, there is a risk of a large number of speculative enquiries and the aggregate costs could damage the interests of scheme members as a whole.’

Earlier this month, MPs on the work and pensions committee launched an inquiry calling for more evidence on the connection between contingent charging and poor advice, or a lack thereof.

Advisers can submit evidence in writing via the committee’s website by clicking HERE. Will Robins

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6 Comments FCA: we'll visit every DB transfer adviser if we need to

FCA: we'll visit every DB transfer adviser if we need to

The Financial Conduct Authority has pledged to visit every firm offering defined benefit pension transfer advice if necessary to improve suitability levels across the market