Defining Broken Transfers: Is contingent charging a red herring?

When discussing defined benefit (DB) transfer advice, contingent charging has become a topic that demands to be acknowledged. But it was not always like this. In fact, for years after the pension freedoms came into play, contingent charging was hardly mentioned.

The Financial Conduct Authority first made reference to contingent charging in March 2018, a month after the Work and Pensions Select Committee (WPC) first urged the regulator to ban the practice. The Westminster committee citied it as "a key driver of poor advice" and arguing "genuine independence is not compatible with a charging model that only rewards advisers for recommending a particular course of action". Suddenly, contingent charging was now all the rage.

That March, FCA executive director of strategy and competition Christopher Woolard said he recognised there was "an inherent conflict of interest when advisers use a contingent charging model" and, as part of a consultation, asked for views on whether the FCA should ban contingent fees for pension transfer advice. Some seven months later, the regulator said the initial evidence given to it did not show that contingent charging is "the main driver of poor outcomes for customers".

Nonetheless, the FCA left the door ajar in case it wanted to change its mind. At that time, Woolard said: "Any changes to our rules on contingent charging could have implications for the supply of advice. Because of the significance of this issue to all stakeholders in the market, we will carry out further analysis and consult on new interventions if appropriate in the first half of next year."  

Months later, in June 2019, the FCA published the results of its marketwide dive into DB transfers, which thrust the issue of contingent charging back into the spotlight. The FCA revealed it was "concerned and disappointed" with the evidence it had seen on DB transfers and vowed to continue looking at the rules governing pension transfer advice. This included the use of contingent charging and then, later that month, it revealed it was formally consulting on a ban. 

While contingent charging has undoubtedly grabbed the spotlight, it is not the only ingredient in a recipe that could create poor DB transfer advice. It could be a red herring that gathered so much attention because of the involvement of MPs.

A pigeon among the cats

The theory that contingent charging could be a red herring might indeed be worth pursuing. After all, advice giant LEBC recently giving up its pension transfer permissions offers a case-and-point example. It shows firms that choose not to adopt a contingent model are vulnerable to having permissions revoked as well, or at least voluntarily giving up permissions after a talk with the regulator.      

In early September, Professional Adviser revealed the national IFA had voluntarily agreed with the FCA to stop carrying out DB transfer advice. A note seen by PA revealed the firm would not be carrying out more DB transfer business, nor would it be able to finish any ongoing work in the area.

Speaking to PA after the firm had cancelled its pension transfer permissions, LEBC director of public policy Kay Ingram stands by the firm's decision not to adopt a contingent model. She explains: "We believe that not contingent charging for advice helps advisers manage any potential conflict of interest. We also support full transparency of advice costs and all clients are told what their advice will cost before work commences.

"We support the aims of the Transparency Taskforce and participate in its initiatives, we also support the WPC in its call for a ban on contingent charging to help reduce potential conflicts of interest." The firm has remained tight-lipped about its decision to stop its DB work, and industry commentators have only speculated on what they believe could have gone wrong.

And, for his part, Wingate Financial Planning Chartered financial planner Alistair Cunningham is confident there are other factors in DB transfer advice that could prompt conflict of interest concerns. As a result, he simply does not buy the arguments from the FCA and the WPC that the practice should be banned because of inherent biases.

"[The FCA] are basically saying [contingent charging] creates a big bias - transfer, and you get paid, don't transfer, and you don't get paid. But to me, the assets under advice thing is massive and a far, far bigger [bias] than contingent charging."

The long-term cash flow from a client after advising them to transfer their DB pension is "far more significant" than what most firms will earn on an initial basis on a DB transfer, Cunningham argues, adding: "Looking at examples of very bad advice and a number of firms that have voluntarily given up their permissions, from what I saw, there wasn't masses of contingent charging… The reasons [the FCA] have given for [banning contingent charging] doesn't hold water for me - they say it's about removing a bias, it just doesn't hold water."  

Tideway manager partner James Baxter agrees. He reckons ongoing business could prove to be a conflict of interest in the case of adviser firms working with pension schemes. In this circumstance, adviser firms work with a company and are able to give transfer advice at a discounted rate because they are working with a single scheme. Through such a relationship they can make use of economies of scale to reduce the price per individual. Like Cunningham, Baxter says the ongoing business picked up throughout that process could prove lucrative for firms, and thus present another conflict of interest. 

Elsewhere, Baxter says it is important to know where assets transferred from a DB scheme end up. He says the issue is not being addressed and is detrimental to consumers: "Somebody needs to clearly make the case that unregulated investments is an industry-wide problem. It's not isolated to DB transfers, it just so happens that DB transfers have big pots and when they get caught up in an unauthorised investment there is going to be a big loss."

For Quilter Financial Planning CEO Andy Thompson, the initial focus on contingent charging is understandable, though he does not believe it should be banned altogether. He worries, however, that resolute focus on one aspect of the process means time is not being spent investigating all parts of DB transfer advice and so the "real issue" could be missed. He points to the problem of insistent clients, something the Quilter boss says the regulator has not dealt with properly.

"As an industry we need to fully engage with the FCA on this matter and look for a solution that ensures we do not have a repeat of the British Steel events," he adds. "But, as an industry,l we shouldn't be taking action that worsen client outcomes just because of outside pressure."

Open to abuse

Shaw Gibbs head of financial services Ed Gibson, however, believes contingent charging deserves all the attention it gets, and is indeed the stand-out issue in DB advice. The financial planner acknowledges there are other bias issues with the likes of ongoing fees, but otherwise argues contingent charging makes it too easy for unscrupulous advisers to make a quick buck and exit the market.

"It's the easiest way to do it," Gibson says. "If you're going to go out looking for DB transfers in order to earn a shed load in fees, the easiest way to do that is to offer the advice for free and say ‘don't worry about it, I'll only charge you if you transfer, and then it will come out of your pension pot, so it's painless. You won't even notice it'.

"I accept the point that some argue there is a similar conflict of interest in terms of DB transfers leading to acquiring funds under management on which you're going to charge 1% per annum. But, if I were looking to screw as much money as possible, accepting the fact I knew what I was doing was wrong and that there was a good likelihood that I had a limited period of time in which to make a killing and then wind up my firm and disappear off, the fact I'm going to be getting 1% per annum over the next 10 years isn't really going to be of much interest. Whereas, if I can get 3% to 5% up front of every DB transfer, if I was minded to do that, I could make loads."

Like Gibson, James Evans, who is a practice manager at Morgan Williams, believes contingent charging is a noteworthy problem: "If the system was always used with a sort of purity of thought and advisers were doing what they were supposed to do, then there's not a problem under any charging system," says the Chartered financial planner.

If an adviser had 50 DB transfer cases for which 49 of them had been considered unsuitable to transfer, he adds, then it is hard to believe an adviser could genuinely approach the 50^th transfer with "the most open mind possible" because at that point the adviser would have done a lot of work for no financial remuneration.

Why ban it now?

As outlined in the above comments, and demonstrated by LEBC's recent withdrawal from the market, it is difficult to argue contingent charging is the sole cause of poor advice in the DB space. So, if banning contingent charging is on the table, why, for example, is the re-introduction of permitted investment lists not being considered for DB transfers to ensure savers do not transfer their gold-plated pensions into risky, esoteric investments?

It is difficult to ignore the enduring presence and influence of the WPC in the last two years. In fact, shortly after the FCA concluded contingent charging was not the "main driver" of poor outcomes, the committee launched an inquiry into the practice. That eventually led to WPC chair Frank Field urging FCA chief executive Andrew Bailey to explore alternative means for addressing "the problem of contingent charging".

For Tideway's James Baxter, it is not a coincidence that the FCA turned its attention to contingent charging just as the WPC started piling on the pressure: "I think it's very politically driven [to ban contingent charging]. I don't know Frank Field very well but he's a politician, and they get a bee in their bonnet but don't always understand all the issues. [The WPC] has honed in on this particular issue because they see the conflict of interests as all-purveying, but the LEBC issue proves beyond a shadow of a doubt that poor advice standards are just as big a deal - if not a bigger deal - than contingent charging, because LEBC's work was all done on non-contingent charging."

Personal Finance Society (PFS) chief executive Keith Richards also believes Westminster pressure was a driver in the FCA's decision to consult on a ban: "Of course there should be little doubt that politics is behind the latest consultation and has forced the FCA's hand. Without any evidence, and completely ignoring the FCA's previous findings, the WPC called for a ban and consistently argued advisers could be incentivised to give bad advice when using a contingent charging fee structure."

Morgan Williamsons' James Evans, however, is less suspicious of the FCA's decision to consult on a ban now, and instead puts it down to typical regulatory progresses: "I think it's a natural progression in the direction [the FCA] is heading, which is that any contradiction between the adviser's interests and their client's interests is being pressed on very heavily.

"It's not altogether different from the route the Financial Services Authority took with commission. To start with, you get them saying ‘it isn't acceptable to have these outcomes, so here's some principals that you should follow'. Then, when that doesn't produce the desired outcome, they move onto the money. Well, I think this is the same sort of thing."

Read more from this series:

Defining Broken Transfers: How should the advice sector handle insistent clients?

Defining Broken Transfers: Were advisers qualified enough to tackle DB transfers?

Defining Broken Transfers: How British Steel brought DB transfers to the fore

Defining Broken Transfers: FCA robustly defends its regulation of transfer advice

Defining Broken Transfers: Is the advice profession heading towards a mis-selling scandal?

Defining Broken Transfers: How pension freedoms were rushed into place

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