How does contingent charging work?
Contingent charging is a model under which financial advisers are paid following the transfer of a client's defined benefit pension. It is an alternative to charging a client for pension advice upfront, which could end up costing thousands of pounds. Some argue that contingent charging works, as it enables everyone to gain access to 'free' pension advice while others argue that it creates a conflict of interest as advisers only get paid if a pension transfer is conducted, and the charges could end up running into tens of thousands.
Why has the FCA banned contingent charging?
The FCA said that it found that too many advisers were delivering poor pension advice, driven by the conflict of interest in the way that they were remunerated. They found that 69% of consumers were advised to transfer their defined benefit pension scheme, despite its view that most would be better off sticking with their existing scheme. It has estimated that between 28,000 and 35,000 consumers received unsuitable defined benefit transfer advice between October 2017 and September 2018.
The average transfer value of all advised consumers in that period was £350,000 which means that in just one year, up to £12.25 bn of pension pots could have been subjected to poor transfer advice. The FCA estimated that ongoing advice and product charges could on average consume around £77,000 of a £350,000 pension pot over a typical retirement period.
What did The Financial Conduct Authority (FCA) say about contingent charging?
The FCA stated that “The practice of contingent charging, where advisers only get paid if a transfer proceeds, creates an obvious conflict. By making changes to the way advisers are paid for transfer advice and the other changes to transfer advice we are proposing today, we want to ensure people receive suitable advice and drive down the number giving up valuable defined benefit pensions when it is not in their interests to do so.”
UK's financial watchdog confirmed that the ban on contingent charging for defined benefit pension transfer advice should be for all but specific groups, such as those in financial hardship or with serious health conditions, which we go into in more detail below.
When will the ban on contingent charging come into force?
The ban on contingent charging has gone through a lengthy consultation process which was initially due to conclude by October 2019, however, it was announced on 4th June 2020 that the ban will come into force on 1st October 2020.
How does the ban on contingent charging work?
The new rules which come into force on 1st October 2020 mean that the FCA will “require firms to charge the same amount for advice on pension transfers and conversions, irrespective of whether the advice results in a recommendation to transfer or not to transfer.”
It will apply across all advice and implementation charges, including for insistent clients, and also where multiple advisers are involved in the process.
There are exemptions however and they will apply to those with an illness or condition resulting in shortened life expectancy or those who are facing serious financial hardship, such as losing their home.
In order to satisfy the FCA that an exemption is justified, financial advisers will need to get the appropriate evidence such as medical records or bank statements. The FCA has confirmed that the exemption will not apply to those who simply cannot afford to pay for advice, as it is a highly subjective criteria.
What does the ban on contingent charging for pension transfers mean for you?
From 1st October 2020 you will need to pay for pensions advice on a defined benefit pension scheme. If you are in serious financial hardship (such as being at risk of losing your home) or if you suffer from an illness or condition that is likely to shorten your life then you may qualify for an exemption and your adviser may still be able to process a transfer based on the contingent charging model.
In response to those that have criticised the ban, the FCA has introduced proposals to allow advisers to provide an 'abridged advice' service which it hopes “will help consumers access initial advice at a more affordable cost”.
An 'abridged advice' service must be given by a pension transfer specialist and should include an introductory chat with a client in order to obtain high-level information, including a full fact find and risk assessment. The result of the 'abridged advice' service should only be to determine that the customer is not a viable candidate for a defined benefit pension transfer.
This new type of advice must be given by a pension transfer specialist and should include an introductory chat with the client, where the adviser can get some high-level information about their circumstances, and should ultimately determine that the consumer isn’t a viable candidate for a transfer. If a defined benefit pension transfer is deemed suitable, then full advice would be necessary and further charges would be expected in order to proceed.
If you are entering retirement soon, you may want to check out our article What are my pension options at retirement.
What if you have already received pension transfer advice under the contingent charging model?
If a regulated financial adviser gave you advice to move your pension and it turned out to be unsuitable, you are entitled to claim compensation, although there is no guarantee that you will win. If the adviser is still trading, you should visit the Financial Ombudsman Service to understand your rights.