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.
I suppose attack is the only option for those advocating DB who have no defence for the many corpses of failed schemes resulting in damaged and poorer retirements of those that trusted them over their working life.
Had they delivered on promises then the vultures would have nothing to feed upon.
As Hyman Roberts say in recent a publication “ Consolidation, when not if”. Note there is no question mark.
Looking at the members position I think you have made the case for contingent fees, Your suggestion to maximise the members costs by applying VAT and out of after tax income is absurd.
Another example of confirmation bias Henry by those wishing to resist the pensions freedoms so many members seem to prefer having lost trust in DB.
Why defend the £2bn a year fee fest of the advisers to DB?
I really don’t feel like defending DB and I don’t think I’m attacking advisers John. There is a problem that the FCA has identified and the bias is in the tax positioning. If I may say so John, tax policy in this country is so tilted in favour of the rich that it makes me angry, and of course those with the means to exploit the weaknesses in the tax system, do so to the detriment of those most vulnerable. Your comment lacks charity.
impartial advice can be paid for via the employer sponsored advice allowance and the Pensions Advice Allowance and IFAs can reduce the cost of advice via efficiencies,contingent fees are unfair and outmoded
Henry, I had no intention fo being charitable just pointing out that you were trying to change the law to suit your argument and in doing so penalise the scheme member with higher charges through VAT and income tax. These are not the rich often the pension scheme is their largest asset and a modest charge for the analysis and an ongoing client charge if they need advice is not unreasonable these are separate issues
The playing field is far from level in so many ways. Take the example of the poor advice in South Wales that we all despise. The errors they make will no doubt have a compensation consequence which will fall as a cost the honest IFA community through the levy will pay.
The errors made in cost and funding of a failed DB falls on the surviving customers of the advisers
should there not be a levy on the Pensions Advisers.or would you see that as unjust or an unacceptable commercial risk
It would be interesting to know how many of the completed BSPS transfers where contingent fees and how many were not.
Non contingent is actually a very useful tool to forestall transfer opportunists and often result in the right conversations between client and adviser at the earliest stage.
Like most things in life, this issue is more complex than first appears.
Non-contingent charging may seem an ethical solution but might discourage people from seeking advice at all (they would have to find several thousand pounds from their personal resources) and for those that do seek advice it then puts them under an incentive to transfer (and so get the fee paid from the pension).
For vertically integrated firms like mine, the DB transfer advice fee is minimal compared with the present value of the future IM fees, so non contingent fees don’t remove the scope for conflict of interest.
VAT regulation is a mess – encouraging transactions over real planning. Why is discretionary IM vatable when fund management is not?
All professionals want to keep the cowboys at bay. How about making any DB transfer fees over, say, £5k, disclosable to the FCA who can then decide if the firm is doing the job properly?
You are so right! Contingent charging has no place in a world where independent and impartial advice or guidance is what customers need. Advisers should be paid properly for their expertise, like any professional. Would you expect an architect to draw up plans for free? Time and expertise should be rewarded.
And here we come full circle to the fact that seemingly only the better off (40%) of customers can afford safe access to the pension freedoms. A pity for the singles who could have done with having their modest DB converted into a more generous (no dependants) annuity.
Banning contingent charging may well solve the DB problem but it will also extend to personal pension transfers as well as switching between funds. Solving one problem usually creates many more, particularly when the regulator devises rules to satisfy consumer pressure.
Meanwhile, back in the Real World (and for the sake of a balanced argument): Has anybody thought of asking a client (ie the ultimate beneficiary) what they think? Rather than perhaps an unnecessary/irrelevant academic argument ensuing here ‘within’ the profession and that has no real benefit ‘outside’ of the industry that those consumers outside of the industry (ie in the real world) actually care about.
And what about scenarios where the DB scheme member cannot immediately afford to settle the fee from non-pension means, for example:
– in a divorce/pension-sharing case
– someone in ill health who has spent all their free cash on medical costs/modifying their home.
– someone who has other debts that they must clear, eg on an interest-only mortgage with no realistic repayment source
– or simply they just don’t want to because their cash reserves are ear-marked for something else that they feel is more important to them (which may include keeping their own business afloat).
Just saying….
(Be careful dismounting that high-horse)
And anyway it would be just as easy for an adviser to charge a non-contingent fee up-front, then recommend the member remain in the DB scheme and to pocket the fee for doing very little work other than presenting the client with an impressive-looking TVAS report and some other template paragraphs – which they won’t understand – and has taken the adviser’s paraplanner only a short while to cobble together.
It is not necessarily so that Contingent fee = ‘Bad’ and Non-contingent fee = ‘Good’.
As for the VAT aspect, I think you need to double-check the actual ruling on this. Just because the end advice may be not to transfer away from a DB scheme, it is not necessarily so that the fee becomes VATable. The VAT status of the fee is determined at the outset – when the fee is agreed
– and at a time when it is not yet known whether the best advice would be to transfer-out or not.
The commentary above on VAT has been over-simplified, and hence it is misleading. Now, I know that in this day-and-age everybody is calling for things to be simple. But it ain’t….at the present time. And the last time I checked, I was living in the present time.
If the take-up of financial advice is to be widened across the masses, adding an extra 20% to the cost thereof is only going to achieve the opposite.
[ If anything, some form of tax-relief on all advice fees should be considered – not just on Adviser Charging taken from within a pension plan. ]
Leading up to 2012 (almost) everyone thought that the RDR would improve matters for the consumer. But it has achieved the polar opposite: fewer people now have access to (impartial) advice.
But hey…..we ‘inside’ the industry bubble can feel better about ourselves now that we can only cover our costs via collecting a fee (and adding VAT) “like other professionals”……an bu&&er catering to Joe Public, as there’s enough HNWI’s to keep the current population of CF30’s in a living for now.
That doesn’t look or taste anything like progress to me.
To close: Imagine you could jump in a time-machine and go forward 25 years from now and see how ‘improved’ things are. We (ie those in the aforementioned bubble) will all still be trying to manage our own drawdown pension plans from our care homes by then since there’ll be (a) no one who can afford advice, and (b) consequently no one employed in providing advice (and that includes to our own children and grandchildren). Think about that one.
Enjoy your Sunday lunch.
Couldn’t agree more
It would be much better, M, if you made these comments transparently . One of the reasons I write my blog is out of personal conviction. You clearly have the same conviction, but your anonymous vitriol leaves me cold.
My Sunday Lunch was spent looking after a relative in intensive care in hospital, thankfully not reading your anonymous rant.
Perhaps the new FCA consultation will help clarify the VAT anomaly. As pointed out here, the situation is too murky. It calls to be determined at the outset but whereas the ‘advice’ test is then met the ‘arrangement’ test cannot be. But even if (as we choose to assume) none of the fees charged in relation to a transfer are exempt, including the final element that is only charged if a transfer is made, it does not preclude contingent fees being charged to the receiving scheme.
A less frequent observation about the FCA’s policy statement in relation to the transfer advice process that has a bearing on charges is what (apparently) many advisers, like us, call ‘triage’. This is an important way to prevent unnecessary charges being incurred because ‘it’s probably not right in your case to transfer’. It can in practice be quite quick to establish whether the necessary conditions for a transfer being potentially in a client’s best interests apply, including for instance i) the transfer value as a multiple of an estimate of the PV of the pension (which can be satisfied by use, even remotely, of a calculator) ii) particular motivation a client presents with and iii) their investment experience. The FCA policy statement makes it clear that it does not expect triage to avoid being advice (even if it jumps to the same conclusion that we are now meant to treat as the starting point) and therefore it is likely to require a full ‘personal recommendation’. The FCA thinks value can be derived from the certainty of knowing, which casts a bit of doubt on the certainty that ought to be attached to its starting point!
I can’t really see how the extra costs can be justified by value received but maybe the FCA left itself no room when it decided after this consultation that advice to stay put was itself a personal recommendation subject to exactly the same process as a transfer. I don’t think anyone expected that.
This perverse symmetry now begs the question how an adviser not having transfers as a permitted business is to be able to say anything about a client’s DB benefits, if suggesting they retain them, by default, cannot now be done without a personal recommendation by a transfer specialist. If I were a PII underwriter, I would probably think the base for risk has just been expanded by an order of magnitude representing everyone with a DB instead of those transferring. I suppose the symmetry does at least mean this whole exercise was not a backdoor way to close down transfers for the masses but rather that everyone should enjoy the privileges of regulated advice, whatever their form of pension.
I really do need a translator here Stuart! I may agree with you!
You’re right, Henry. When commenting I tend to rush and forget the need to act as my own sub-editor. Let’s see if I can make it clearer. I would be very pleased if you do then agree!
The VAT anomaly you refer to is definitely part of the contingent fee problem. Hopefully the new FCA consultation on contingent fees will address what is currently very murky application of VAT rules. Whether VAT is chargeable is (as we understand it) tested at the outset of the service. You know at the outset that it’s advice (which is not exempt) but you don’t know at the outset whether it will turn into ‘arranging’ a transfer, which could (at a pinch) be the ‘dominant supply’ and therefore (if known at outset) exempt. Though it would be helpful if any VAT bias could be removed, by exempting nothing, that will not of course on its own deter contingent fees. For instance, we already make part of our fees contingent (reflecting the size-related liabilities that only arise if transferring) yet we also charge VAT on that part. And if it were all exempt it wouldn’t necessarily affect contingent charging, as there are other reasons for it, mentioned in this thread.
I wanted people to be aware that the FCA has thrown a spanner in the works by making it difficult for advisers to conduct any kind of ‘triage’ before committing to advise on a transfer, triage being a quick and dirty assessment of the likelihood that a transfer will increase the client’s utility or welfare. It could just be Q&A but we also use some model outputs. Q&A means its scope is personal to the prospect not general education. Triage is an opportunity for both sides of the possible contract to qualify each other – so it’s also partly a new-business procedure. The advantage of it for the member is that it can avoid them committing to an expensive advice process where there is perhaps little chance of a useful outcome. But telling them that is apparently going to be treated as advice, requiring the full Monty of a compliant transfer analysis culminating in a suitable personal recommendation. Although the FCA says that, in that case, there is value for the customer in being certain that the transfer will not increase welfare, this strikes us as curious given that they have gone back to stating (effectively) that the default position is to retain the DB. If it were genuinely neutral (it could go either way, each with risk of detriment), scrutiny might be worth paying for but not if it’s the default.
You might conclude that the FCA’s position now is that you either say nothing or you complete a full advice process. But it’s actually not that simple because there’s another surprise in the policy statement: you cannot now justify saying nothing! If a client presents with a DB pension and you’re doing retirement planning which is partly dependent on this risk-free income underpinning, you now appear to need to make a case, via a full transfer advice process, for either retaining or transferring. There is a certain admirable symmetry in logic to this but it still looks perverse as a regulatory approach. It appears to involve unnecessary extra costs for clients (in a way that now cannot even be avoided by triage-type calculations). It poses a compliance problem for firms who do not have transfer permissions (that’s most). And since most people in the future will probably not transfer, it also presumably means that the volume of advice subject to insured risk via PI massively increases.
I believe the appropriate saying (though I didn’t think of it first time round) is ‘the perfect is here the enemy of the good’.
You cannot read into these observations any position on contingent fees, Henry. However, for completeness: our approach at Fowler Drew is that all fees should be i) flat/fixed and ii) non-contingent – except for an element reflecting the the size-related costs and risks that are contingent on arranging. In our case, with most advice processes being heavily quantitative and systematic, arranging transactions is the most inefficient and low-productivity element so it may be a slightly higher proportion than if we had to charge more for the advice component. The value-based element of the ongoing wealth management charge is on average about 10% – all the rest is at a flat rate. Our view is that for an integrated firm that is genuinely holistic in scope, a flat fee for this scope is the best way to deal with most of the conflicts of interest inherent in the relationship. So I find myself with you in practice (avoid contingent wherever possible) but not in principle (conflicts may be better managed than avoided at all costs. How come? Firstly, pure advice services with no ongoing functions that might pose a conflict are a luxury society as a whole simply cannot afford. Secondly, integration of policy and implementation is the hallmark of outcomes-driven or LDI-style investment and is the most important innovation to have occurred in private wealth in my lifetime. I’m not even convinced it’s wrong for investment consultants.
I hope this helps. Happy Easter to you and yours.