FCA under renewed pressure from MPs to ban contingent charging for #pensions advice https://t.co/ET5dOtTcKI

— Josephine Cumbo (@JosephineCumbo) May 16, 2019

This is good news. The pressure on the FCA to ban contingent charging for pension advice must continue. Because it opens the door on wider issues which I will explore in this blog.

You can read Frank Field’s letter to the FCA’s CEO , Andrew Bailey here (someone should tell him the FCA has moved!). Field is urging the FCA to look at compromise solutions, I agree. There are people who need help on DB pensions who cannot afford that help and there may be ways to accomodate these special needs into a framework that stopped the use of contingent charging in the generality.

Why hasn’t the FCA acted so far?

It seems the FCA are running scared of investigating the links between firms that charge for pension transfers on a “no transfer no fee” basis and the provision of bad advice

The FCA has confirmed to me that it has not analysed what adviser fee models were used where it found cases of unsuitable #pension transfer advice. @frankfieldteam @CommonsWorkPen

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— Josephine Cumbo (@JosephineCumbo) May 16, 2019

I am genuinely surprised to read this.

The FCA has called the industry for evidence of the damage that contingent charging has or hasn’t done, but it has its own data from its own investigations. What is holding the FCA back?

Isn’t it time that the FCA took the issues surrounding contingent charging more seriously?

The issues are conflicts of interest between an advisor’s business model and its client’s needs.

Under contingent charging an adviser won’t get paid unless their customer acts on their advice to transfer a pension, a move not seen as suitable for most.

MPs say this fee model creates a “glaringly obvious” conflict of interest for advisers.

— Josephine Cumbo (@JosephineCumbo) May 16, 2019

Take the lid off the contingent charge powder keg and any spark will ignite not just pension transfers but the wider issues arising from vertical integration.

This is what I suspect holds the FCA back.

Financial planning as lead generation

There is a conflict of interest between the needs of wealth managers (wealth to manage) and the work of financial planners (protection against living too long, dying too soon or losing an income).

Since the big bucks are in wealth management, financial planners (including those offering financial well-being in the workplace) are becoming little more than lead generators for wealth managers.

If every solution to the financial planning involves using an allied wealth management solution, it is not hard to see how financial advice gets distorted.

This is at the root of the contingent charge problem.

It is not just that contingent charges take the friction out of  the charging and collection of fees for transfer advice. They also liberate the wealth stored in DB plans for the benefit of wealth managers.

It is hardly surprising that the contingent charging model was created and deployed by Tideway, a wealth manager.  For Tideway, DB transfers are the basis of the wealth management business. Much the same can be said of St James Place and Quilter. Take away contingent charging and the whole funds eco-system is starved of the oxygen of new business.

The Treasury angle

The wealth management lobby is a powerful one. It influences the Treasury, The Work and Pensions Committee, has the interests of the public’s financial futures at heart. The Treasury has to balance the books.

This is another conflict, but a more fundamental one.

The impact of pension transfers in the short term is to bring forward revenues for the Treasury at the expense of the long term financial futures of ordinary people who otherwise would have had a defined benefit pension scheme.

The wealth management industry, including advisers, platform managers, fund managers, asset managers and the host of those who charge to the funds, is what the UK financial services industry is.

It needs constant feeding and the best source of its nutrition is the trillions locked up in occupational pension schemes (especially the DB ones).

This could be why the FCA are dragging their feet

“We have not completed an analysis of the relationship between fee structures and unsuitable advice”.

— Josephine Cumbo (@JosephineCumbo) May 17, 2019

Thankfully we have a parliamentary democracy that isn’t going to let this lie.

Nick Smith MP @BlaenauGwentMP asks Govt why the FCA is “dragging its feet’ over contingent charging. https://t.co/AOFV3nYarv

— Josephine Cumbo (@JosephineCumbo) May 17, 2019

Well done Nick Smith.

The long term solution is collective

If we are to break this cycle of conflicted lead generation , we will have to take on the demands of wealth management and create an effective lobby for collective pension provision.

DB pension plans are an effective way of delivering a wage for life. They are unaffordable to some employers and so we need to look at other ways to deliver effective pension planning. CDC is one other way.

De-risking DB plans by promoting DB transfers – as happened in 2017 through the irresponsible behaviour not just of advisers, but of trustees, journalists and (through the absence of action) regulators – is not a good way to deliver pension outcomes.

The wealth advisory model has its place, but its place is not Port Talbot.

Nor is wealth management the answer for most of the £36bn that left occupational schemes in 2017.

The tap that was turned on was marked “contingent charging” and that tap is still open. Though transfers are less common today, it is not because of a change of sentiment among wealth managers, it is because the cost for their lead generators has risen due to PI premiums. Many Pension Transfer Specialists can no longer generate leads for their wealth managers because of the cost of Professional Indemnity Insurance.

This is a crazy way to regulate the flows of assets.

The FCA belatedly are looking into advisory practices and I would be very surprised if any of the 30 firms that they are investigating conducted transfers using upfront fees.

SCOOP: FCA investigating 30 individuals and firms for poor #pension transfer advice and scams https://t.co/AEaL7RjEvJ

— Josephine Cumbo (@JosephineCumbo) May 11, 2019

Sadly, for those who have paid for poor advice out of their funds, the findings of this review may prove too little too late. For those advisers who have not been caught up in the contagion of conflicts, there is little to feel good about. They will have to pay higher fees to fund compensation through FSCS and the reputation of their (good) work will be tarnished.

Contingent charging should be banned and the murky world where wealth managers use financial planners as lead generators should be investigated.

Above all we must promote the power of collective pension schemes to deliver good outcomes to ordinary people and stop pretending that liberating these pensions into wealth management solutions is the answer for ordinary people.