If the FCA want to get to grips with the problem of contingent (conditional) charging, they had better have a look at the taxation of advice and make changes in the Finance Act 2018 to the way we tax advice.
First the facts, as verified by those financial advisers practicing in the transfer market.
Case one
Someone consults an IFA on whether to transfer. IFA says that independent of the size of transfer, a fee of £2500 +VAT will be payable for the research, advice and recommendation on what to do.
Case two
That someone consults an IFA, who says he will do the same research, analysis and transfer and will only charge for it, if a transfer is made. The same fee is payable but this time there is no VAT to pay and the fee can be paid out of the transferred monies.
In case one, the actual amount that will have to be paid is £3000 (VAT adding £500) and the amount that will need to be earned (the client pays a marginal rate of tax of 40%) is £5000.
Put simply, it costs this person twice as much to pay a non-contingent charge and the difference (£2,500 v £5,000) is entirely down to the HMRC subsidising conditional charging.
“Intermediation good – advice – not so good”
I asked top IFA, Dennis Hall why contingent charging gets the tax-breaks while the adviser who charges for advice alone, lands his client with a whopping tax-bill
intermediation (advice leading to product) is zero rated – advice alone isn’t – so as you intimated, advice that says ‘not a good idea to transfer’ costs 20% more than advice to transfer.
— Dennis Hall (@YellowtailFP) February 17, 2018
Actually , it costs twice as much as Dennis and I , hadn’t considered the income tax situation.
Just what “intermediation” has got going for it is unclear. But the impact of this taxation anomaly becomes even greater , if you consider that an adviser who charges conditionally, can also levy the cost of implementing the advice in a tax advantaged way.As David Penney puts it in his tweet.
Non contingent fee of £2,500 plus VAT. Recommendation to transfer. Further £2,500 payable. The whole £5,000 becomes exempt. £2,500 advice fee would be VATable if transfer not recommended.
— David Penney (@DavidPenney10) February 17, 2018
Treading on thin ice
There is a problem here; even if HMRC were to separate out the recommendation to transfer fee from the implementation fee and stop the lumping of the two together as an implementation fee (non vat-able and payable from a tax privileged fund), the smart IFA would simply knock his transfer fee down to £1 and load the cost of the implementation.
Paul Lewis had a laugh at me when I tried to sum up the problem in 140 characters.
‘VAT issues are endemic to vertically integrated propositions’ is a phrase you don’t hear very often!!
— Paul Lewis (@paullewismoney) February 17, 2018
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But I forgive him as he put his finger on the nub of the problem
Henry is right. Scrap contingent fees and you take out the charlatans as it’s not worth their while. If some folk can’t afford to pay for advice then they will not transfer which is almost always the right advice anyway. https://t.co/bcocXPHDYW
— Paul Lewis (@paullewismoney) February 17, 2018
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Such a brutal analysis misses the subtlety of my pompous little phrase but gets to the heart of the matter. Right now it is massively expensive to pay a non-contingent fee, so expensive that only those with deep pockets can do so.
If HMRC’s (and by extension) the FCA, wants to make transfers special, they can ban conditional charging and continue to levy tax and VAT on the non-contingent fees. That would make transfers a rich-man’s game, (it wouldn’t however put an end to the endemic issues with VAT and vertical integration).
Putting an end to Contingent Charging would reduce transfer activity.
The conversation on contingent charging that started when Martin Bamford appeared on Moneybox and ended when we all went to bed. It involved about 20 advisers, Paul Lewis and me. There was one tweet from Martin Dodd which should be picked up on by the FCA and any financial journalist worth his/her salt.
We unilaterally introduced a contingent charging ban in our practice. Guess what, the numbers of people prepared to proceed to advice fell through the floor. Perhaps not a bad thing after all.
— Martin Dodd CFP (@martin_dodd) February 17, 2018
This is the grist of the matter.
By allowing contingent charging to be deemed “intermediation” , the FCA and Treasury are putting the cost of transfer advice within the range of everyone. Advisers love it, they are simply taxing people’s futures with minimal pain today. As the perceived benefit of the pot over the pension is so enormous, no one is asking any questions.
But as we discovered in yesterday’s blog, the FCA knows that 53% of the advice given to those transferring is questionable, so it really ought to be doing something about the frictionless process created by their own tax rules (the FCA and HMRC both come within the compass of one Government department – HM Treasury).
“Intermediation” is the democratisation of villainy
The FCA’s wider problem with vertical integration (as articulated in the asset management market study) is also made worse by “intermediation” as it makes the non- charging of VAT , a benefit of any advice linked to the product being recommended.
Wealth managers, as the picture to the right suggests, now consider themselves “manufacturers” and can integrate their advice into the product, exploiting the same “intermediation” loophole as those affecting transfers.
Indeed the majority of firms holding themselves out to be transfer specialists – are wealth managers at the same time.
But of course they are more than wealth managers, they are altruists, for they are – through contingent charging – offering the most cash-strapped access to their pension pot!
I have (again) pompously referred to this as the democratisation of villainy.
Why this stinks!
The current use of tax-privileged pension pots to pay for everything is ripping off the tax-payer and making IFAs rich. It is enabling transfers that are questionable or downright wrong and it is storing up problems for tomorrow.
But tax-privileged intermediation underpins the entire shooting match of vertically integrated financial services, extending way beyond transfers and wealth management into institutional fiduciary management.
Where you stop is anybody’s guess; but stop it must. We need to stop proliferation of VAT and tax abuse so that reputable advisers like Martin Dodd and reputable clients, who play by the rules, are not further disadvantaged.
I will shut up now, aware that I have opened a particularly smelly can of worms which most of my readers will recoil from, because they are in part complicit to these bad practices.