Along with Al Rush, Jo Cumbo , Michelle Cracknell – I was interviewed yesterday by the BBC Moneybox team for a Christmas special on pension transfers.
It’s always good doing these things as it forces you to say what you really think.
Yesterday I found myself talking abut the curse of contingent charging which – like Paul Lewis – I consider as commission by another name.
In this I disagree with Al Rush who uses contingent charging to help what I consider “vulnerable customers” with special needs for cash rather than income.
Although I know that good advisers use contingent charging (including advisers on this thread), I think those advisers do so because of the wish to do the right thing for the client. Contingent charging – in extreme cases – could be justified if the customer was “vulnerable”.
— Pension Plowman (@henryhtapper) December 8, 2018
For Al, the opportunity to charge contingently allows him to advise people on their DB pension rights in a way that he couldn’t if he had to demand a cheque upfront.
So when I wrote a blog on this earlier in the week, I was struggling with the conflict between “financial inclusion” and “consumer protection”. Frankly 9 times out of 10, I would argue that if you haven’t got the cash to pay for advice, you don’t have the cash to take the risks of pension drawdown.
In the past, providers employed “inspectors” to mark introducers homework. Regulators now do this. Especially where advice is given on a contingent charge, the advice must be spotless. https://t.co/OIKomTDzNM
— Pension Plowman (@henryhtapper) December 8, 2018
Nic Millar pulled me up on “spotless” – (of course all advice should be spotless), I should have said “proportionate”. The FCA are rightly worried that the proportion of those who pay a contingent charge and are worried about the advice is much lower than those who pay for the advice independently. In one sense the risks of taking a transfer should be disproportionally promoted to those paying by a contingent charge. The Transfer Value Comparator should be posted at the front of any suitability report paid for by a contingent charge.
The other relevance of the word “proportion” is to do with numbers paying for advice out of the fund. In my view, the numbers out of all proportion to the need. The need for contingent charging is a “special need”.
Examples of vulnerability “medically diagnosed shortened life expectancy” “Extreme and urgent debt relief (where access to DB money – not possible) De-minimis pensions forsaken (CETV <£50k. – cash drawdown clearly tax-preferable for low income family.
— Pension Plowman (@henryhtapper) December 8, 2018
The FCA’s definition of a vulnerable customer is interesting
A vulnerable consumer is someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care.
The FCA’s report on the quality of transfer advice contains this alarming set of statistics
As part of our review of the 18 firms’ processes we reviewed the advice they gave on 154 transfers. Our suitability findings were as follows:
- suitable: 74 (48.1%)
- unsuitable: 45 (29.2%)
- unclear: 35 (22.7%)
These results are little different from their findings in 2017 and compare unfavourably with their research into retirement income advice where over 90% of advice was deemed suitable.
IFAs know what they are doing and what they are doing is providing unsuitable or unclear advice over half the time.
Can we really pretend that the disproportionate incidence of poor advice is down to IFA ignorance or lack of talent? I don’t think it’s that. I think the reason that IFAs get it wrong is that they have to distort things to get paid.
This is the problem with contingent charging, it distorts good quality advisers into poor quality advisers, it is storing up problems for the future and that the FCA has yet to address this problem – is worrying. The door has been left open for the FCA to ban conditional charging – I have called for that draconian action in the past
I am now going to change my position. I think it enough for the FCA require anyone who is requiring conditional charging to be deemed a “vulnerable customer”.
This is because I agree with Andrew Warwick-Thompson
Contingent charging for DB transfer advice encourages poor decision making by both parties. It suggests to consumers that advice on a particularly complex financial decision isn’t worth paying for, and incentivises advisors to recommend only one course of action.
— Andrew Warwick-Thompson (@AWarwickThomps1) December 8, 2018
but I see the needs of Al Rush. By making contingent charging available only to those with special needs, advisers will have to make sure the advice is proportionate to the special needs of the customer, the PI insurer and the regulator. There is one final point to consider – tax.
Of course the contingent charge deprives the exchequer of VAT and the money taken from the fund defeats the purpose of pension tax relief as it decreases rather than increases the amount available to provide a pension. I can see no fiscal justification for a contingent charge
— Pension Plowman (@henryhtapper) December 8, 2018
Right now – contingent charging is being used as a tax-dodge for higher rate tax payers, I can hardly see “wealthy clients” who can pay their taxes, being allowed to escape them through a regulatory loop-hole.
I have always been in mixed minds with regard contingent charging on DB pensions (I don’t do them anyway). But I think your adjustment of Al Rush’s position to bring in relevance of the “vulnerable client” issue is very good.
It could make both the FCA, PI insurers and FSCS levy payers much happier if contingent charging was banned other than “vulnerable clients” who were simply unable to pay the fees, especially if levied using a triage service method with three stages, each invoicable before each stage is undertaken.
We have always needed to work using a triage method as we have never had DB tf permissions (although my locum used to but chose to cease DB business as it put too much risk on his business and made PI options more difficult). I can’t remember the last client who got to the third stage of triage as invariably something has resulted in it being inappropriate to consider the transfer further and this the costs to the consumer (whether vulnerable or not) of the FCA’s default position on DB transfers not being changed by unusual personal circumstances.
From a regulatory and PI perspective, if only vulnerable clients could do contingent charging and therefore “vulneable client” would need to be stated and could go on the firms Gabriel report, it would make targeting very easy.
We have a case in front of the FOS as we speak where the consumer was 6 months away from her NRD and needed £6k for home improvements, she was “advised” to transfer her DB scheme which the non G60/AF3 qualified adviser had known about for a decade and not transferred until March 2015, i.e. 2 weeks before he’d have needed to pass AF3. She had no monies to pay an up front fee and yet paid £3k as a contingent charge as a low risk client to access this, the only guaranteed income she and her husband had other than state pensions. Took 6 months before it got to FOS and now we’re another 3 months in.
Had she been deemed a “vulneable client” and this been reportable on Gabriel and on PI applications, this case would have been looked at immediately, not 3 1/2 years after the event.
Unfortunately the terms are far too general to have a working rule that covers all situations. There are many situations where the risk of an investment is shared and charges levied only when the project produces an exceptional return. One of the results of removing commission is the considerable reduction in the number of advisers. Those that remain have to deal with the top 10% of earners to have any chance of a viable business. At scale for the next 30% of earners DIY platforms make many millions for their owners. Other companies still do pay commission to sales people in “vertically integrated” sales forces still structured like Hambo Life. The number of direct salepeople are increasing copying the SJP model All rhese advisers pay a levy for the errors (greed) of the unqualified and those taking introductions from the unqualified marketing projects as you saw in South Wales. Unfortunately the good are tarred with the same brush as the dishonest. The victims claim from FOS Now we find that people are not saving. Who can blame them with all the negative criticism and who is now available to encourage saving? DB transfers have almost stopped because of the lack of PI capacity having even more than any of lobbying.
Nothing happens until someone sells seems to have been forgotten
Do you think it could be argued that in-product sales costing has made phones more available to the masses? Good job they didn’t call it commission otherwise mobile phones would only be available to the rich