IFAs who persist in conveyor belt transfers based on contingent charging will kill the transfer market.
Why people are taking a punt if they pay on the never-never.
The FCA have made it clear that to transfer out of a defined benefit pension scheme, you need to be special.
Conditional charging means you only pay if you take the money and that’s like giving someone a 100% mortgage. The trouble with 100% mortgages is that a lot of people bought houses and could not keep up the payments, the trouble with conditional charging is exactly the same – the only difference is that instead of losing your house, you lose your pension pot.
Not everyone who takes a transfer, loses their pension pot but the odds are stacked against you if you do.
- The fee you pay will not be charged to you but to your pension – like a mortgage arrangement fee – it will push up the charge on your pension
- Not only are you likely to increase the charge at outset, but you’re likely to find yourself in a high-charging ongoing drawdown plan. As happened with many BSPS transfers
- Finally, you are picking an adviser who has accepted conflicts of interest in taking you on; while you may be lucky , you’re taking a chance on your adviser’s stick ability
In short, you are entering into a hire purchase agreement, taking out the equivalent of a 100% mortgage and taking your chance on your mortgage broker. You may get away with it but you are stacking the odds against you.
Why IFAs are taking a punt if they charge on the never-never.
The FCA have made it clear they understand these risks. In their report on BSPS transfers, Megan Butler said the FCA’s policy on contingent fees is that they are
“higher-risk than a time-cost charging model due to the need to sell products to generate revenue”.
Frank Field went further in his report, claiming
The advisers, using contingent pricing models, were then incentivised to push those transfers, often against the interests of the scheme members. While doing so, they shamelessly bamboozled those members into signing up to ongoing adviser fees and unsuitable funds characterised by high investment risk, high management charges and punitive exit fees.
and the Work and Pensions Select Committee concluded
Contingent charging gives rise to an inherent conflict of interest. The theoretically independent adviser is only paid if they advise a particular course of action. The FCA acknowledges this concern, but hopes that guidance and careful monitoring will ensure adequate consumer protection. This model has failed BSPS pensioners. The FCA’s own national research also gives cause for great concern. Another major misselling scandal is already erupting and requires urgent action. We recommend that the FCA ban contingent charging on defined benefit pension transfer advice. Genuinely independent expert advice, on what for many people could be their biggest financial decision, has a value irrespective of whether a transfer is the outcome.
IFAs are selling themselves short. If they believe in the value of advice, they should be selling financial advice, not the wealth management that too often pays the advisory bills.
Why the FCA has no choice but to ban Conditional/Contingent pricing
The FCA’s latest pronouncement on DB Transfers are not encouraging. Their research over the past two years has shown that of the transfers sampled
- 47% were suitable
- 17% were unsuitable
- 36% where it was unclear if the recommendation was suitable
The FCA has also considered the suitability of the recommended product and fund and found that:
- 35% were suitable
- 24% were unsuitable
- 40% were unclear
These figures compared with the 90/91% suitability ratings found in the samples of advice on accumulating and De- cumulating in DC pensions.
Dave Thompson, commenting on this blog makes this point better than I could
The FCA is coming under considerable pressure, not just from the Work and Pensions Select Committee. Lloyds Banking Group are paying out £250m a month in DB transfers from their staff scheme, Barclays even more. Other large schemes I have spoken with explain they are sitting ducks, one CIO I know has picked up the nick-name “cashpoint”. Occupational DB schemes are fed up with being defenceless from advisers who seem to be operating a conveyor-belt service, some taking hundreds of millions into investment solutions they would never countenance.
Top IFAs know that contingent transfers must end
In a statement to Money Marketing, Kay Ingram said
We agree that contingent charging should be banned. It is not a practice which LEBC employs, as we believe it is important to maintain a neutral approach when advising on pension transfers. We charge a fixed fee for advice, regardless of the outcome of that advice. Those who charge contingent fees will inevitably have a bias towards recommending a transfer. For most clients, , transferring will not be suitable unless they have “special circumstances.”
“We understand the argument used by some, who charge contingent fees, that not everyone has the funds available to pay for advice out of their own pocket. We do not agree that this justifies contingent charging.”
Martin Bamford was equally adamant in his opposition to the practice on today’s Moneybox. You can hear what he had to say here.
I have made my opposition to the practice clear. I made the point with Rory Percival at last summer’s Great British Pension Transfer Debate and I made the point at the Work and Pension Select Committee. I made it again today on twitter
“People don’t know how contingent charging can happen in a regulated world” – says @paullewismoney .@thefca are currently reviewing the rules; let’s hope they ban this pseudo-commission.
— Pension Plowman (@henryhtapper) February 17, 2018
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I fear that unless IFAs voluntarily stop charging in this way, they will continue to have their permissions to advice, taken from them.
The advisers that have had DB “permissions suspended” All operated contingent charging. They also operated an advice process where everyone was offered the same solution to transfer into, weather you were 31 or 61, financially astute or not. IFA 1 140 transfers, 140 recommended With Profits. IFA2 100% in-house DFM solution. IFA3 Platfom with”special deal” and inhouse MPS! There is very little evidence of individual advice. A commoditised process.
Just ban it then. Of course, the argument that for some people, it’s the only way to access advice will still remain so before you ban it, come up with another solution to enable people to pay for the advice they receive, regardless of the outcome of said advice.
If I charge a fixed fee for advice and the IFA next door offers “free” advice but has contingent charging as part of his or her model, then I’m willing to bet that a disproportionate number of people will seek out my neighbour.
And before anyone says it, I know you can’t just ban it – it’s complicated. But we are all, to some degree, complicit in what has and will continue to happen.
Well you can run with it James, but having lost my business to the first mis-selling scandal, I’d warn you against being too cavalier! Not that I suspect you are!