The Financial conduct Authority (FCA) is consulting on a ban on contingent charging on defined benefit (DB) transfer advice.

In a paper published this morning the FCA said: ‘We are concerned that too many advisers are delivering poor advice, much of it driven by conflicts of interest in the way they are remunerated. In particular, the practice of contingent charging creates an obvious conflict.’

The FCA has therefore decided to consult on a ban on contingent charging.

Background

The government’s pension freedoms gave consumers with defined contribution (DC) pensions more flexibility in how and when they could access their pension savings. The government created a mandatory advice requirement to prevent members of defined benefit (DB) schemes transferring against their own best interests.

DB pensions are extremely valuable as they offer guaranteed, inflation-proofed lifetime income for them and their spouse, which most consumers want in retirement. However, significant numbers of DB scheme members have transferred to DC schemes.

In our view, given the advantages of DB pensions, the proportion of consumers advised to transfer is too high. We believe that many of these transfers will not have been in consumers’ best interests.

Initial conflicts of interest – contingent charging

We are concerned that too many advisers are delivering poor advice, much of it driven by conflicts of interest in the way they are remunerated. In particular, the practice of contingent charging creates an obvious conflict. This is where advisers only get paid if a transfer proceeds.

We are consulting on the following proposals:

• To ban contingent charging, except for groups of consumers with certain identifiable circumstances that mean a transfer is likely to be in their best interests.
• Where contingent charging is permitted, advisers will have to charge the same amount, in monetary terms, for advice to transfer as they charge when the advice is non-contingent.
• To introduce a short form of ’abridged’ advice that can result in a recommendation not to transfer based on a high-level assessment of a client’s circumstances. This will fall outside the proposed ban on contingent charging and should help maintain initial access to advice.

Ongoing conflicts of interest

We are proposing strengthening our existing requirements that advisers giving pension transfer advice should consider an available workplace pension as a receiving scheme for a transfer where one is available.

This is intended to address the conflicts of interest created by ongoing advice charges. It will also reduce the level of transfers involving unnecessarily complex and expensive solutions.

Other proposed remedies

We have concerns about advisers’ overall competence and their ability or willingness to give consumers information to understand the implications of a transfer. So we are consulting on a package of proposals including:

• remedies intended to improve consumer engagement with the advice process (for example, improving charges disclosure)
• a requirement that pension transfer specialists complete 15 hours of continuing professional development (CPD) each year, on top of any other CPD they undertake
• extending the range of data that we currently collect from financial advisers to improve our ability to regulate the sector
• technical amendments to our rules, which include changes to the definition of a pension transfer