Last week the work and pensions committee opened a new inquiry focusing on how advisers charge for pension transfer advice.
Following on from the committee’s pension freedoms inquiry in the wake of poor advice given to members to transfer out of the British Steel Pension Scheme, it is now considering whether contingent charging is a cause of unsuitable advice.
While the Financial Conduct Authority (FCA) backed away from proposals to ban contingent charging towards the end of last year, it has always acknowledged it creates a conflict of interest that it is up to advice firms to manage.
The FCA has confirmed to the committee it shares its concerns, but requires more evidence of its mishandling to take action.
Talya Misiri asks advisers and pension specialists the best ways advisers can manage potential conflicts of interest in this area and how they can ensure they are working for their clients and not for their own gain.
IFAs should have to put their cases through a process. There needs to be a panel that assesses the suitability of proposed transfers.
This panel could sit within the Single Financial Guidance Body or the Financial Ombudsman Service. It could meet around two set times a week and take on 20 cases per session.
But even then there is no way to manage conflicts of interest with contingent charging because the conflicts are dire.
Conflict of interest issues arise when clients are advised to do something they do not want to do. Or when IFAs, who would like to do what is best for their clients, work within companies with sales targets they are expected to meet.
Managing targets and looking out for clients are incompatible goals. It is very difficult to manage these conflicts.
Henry Tapper is editor of the Pension PlayPen and director of First Actuarial
The starting point with contingent charging is a lot of advisers may not realise they are subject to a conflict of interest. Some believe they are giving suitable advice, and in 99% of cases they are.
However, even subjective areas, such as the suitability of advice, can be measured. And an intermediary, in this case the adviser, may subconsciously work in their own best interests despite giving reasons for the decisions they believe are best for the client. For example, they may signpost death benefits and flexibility as a reason to transfer.
Advisers need to think about how to manage this conflict. The first step is to realise this is a problem. Firms have to find ways to mitigate that subconscious bias. I have two suggestions.
The first is to set down a written framework outlining pension transfer scenarios. Include common cases where it is suitable to transfer, such as for those with not long to live. And cases where a transfer would not be suitable, such as for people with no other pension or savings, or younger clients who want flexibility but would be better off staying in their DB scheme for now.
A number of set scenarios can build a firm level framework, a starting point for advisers to refer to when deciding on a transfer to mitigate subconscious bias.
The second suggestion is to set up a complex case panel. This can be established within a firm and comprise three or four people. For example an adviser, a senior paraplanner, a compliance officer and possibly a senior pension transfer specialist. A group that can get together easily, possibly once a week or for a specific case.
The advantage of that is a collective decision is made so the individual adviser’s subconscious bias can be mitigated. A key tip regarding this is that the decision made by the panel has to be unanimous.
The rules on suitability state a decision on transfers has to ‘clearly’ be in the client’s best interests. If someone on the panel disagrees with the decision, it suggests it is not ‘clearly’ in favour of the client’s needs.
Rory Percival is a regulatory consultant and technical specialist
Suitability rules already exist that prevent an adviser from recommending something not in the interest of the consumer. It has absolutely nothing to do with how they get paid. Those rules are solid and simply need to be enforced more aggressively by the FCA.
Enforcing the rules is easy to say but harder to deliver in practice. The IFA profession is fragmented and a regulator that could monitor more than 8,000 firms would require a totally unviable increase in funding. This would come from the firms who are already hacked off about how much they have to pay.
The desk-based, risk-based approach is probably the best way of monitoring such a broad industry. The FCA is not able to audit every firm; that would be prohibitively expensive. So it has to take a view on how to get the overall picture. This needs to be risk-based and that means there is always going to be something missed.
Both suitability and conflict of interest rules already exist to prevent poor outcomes. If poor outcomes happen, it is because the firms have not followed the rules.
Introducing more will not help matters. Being more effective at enforcing the rules already in place is more important.
Mis-selling scandals have been around for so long and will continue to be for a whole range of reasons. Banning contingent charging will not stop them because contingent charging did not cause them.
Anthony Morrow is chief executive at eVestor
It seems academics are blaming contingent charging for unsuitable DB pension transfers. But the charging structure is not the real issue. Removing contingent charging will not resolve this.
As an IFA, you are the agent of the client so you should stand with them. However, if there are some dishonest advisers, contingent charging will not get rid of this.
We do not charge contingently for DB pension transfer advice because we feel it is important to tell clients up front they will pay, say £3,000, or whatever is agreed, for a full report on their options, which may well tell them not to move. Even if this means they walk away.
As a business, we have compliance systems to mitigate conflicts of interest and our five core business values are central to all our staff. These are: knowledge, integrity, innovation, fairness and fun. We ensure clients know we have the knowledge to assist them, and we are honest and fair with how we work and what we charge.
Any transfer report produced is double checked and, given the detail to be covered, will be many pages long. If you are getting it right, you should have all the reasons and scenarios detailed, and then simply and carefully explain to the client your decision as to whether a transfer is suitable. Two to three pages is nowhere near enough to cover this.
Alan Steel is chairman at Alan Steel Asset Management
We asked our Twitter followers about this. Here is what they said:
The obvious ones are compliance department and pension transfer specialist looking more carefully at such cases. Of course, if we had effective triage, the potential bias would be far, far less.— Steven Cameron (@_StevenCameron) January 8, 2019
Everything we do has a conflict of interest... For DB cases compliance or a 3rd party could provide an opinion to mitigate any conflict— Kusal Ariyawansa (@Kusal_CFP) January 9, 2019
Um, always do the right thing for the client? Have I missed a point, or is it just that simple?— Chris Budd (@ovationchris) January 8, 2019
Yup, doesn't matter how you charge just do the right thing for the client not yourself— Darren Cooke (@RedCircleFP) January 8, 2019
conflict manged #fixeditforyou