Providers St James's Place (SJP) and Quilter have told MPs they should not ban contingent charging on defined benefit (DB) transfers, warning such a ban would increase the advice gap.
MPs on the work and pensions committee are currently leading an inquiry into contingent charging on transfer advice following the Financial Conduct Authority’s (FCA) decision not to go ahead with a ban.
SJP said in its submission (which you can read in full here) the FCA has not found evidence contingent charging increases the likelihood of poor transfer advice. The provider added the cause of bad advice is poor behaviour from individual advisers.
‘The specific evidence provided to the committee regarding advice given by certain advice firms to members of the British Steel Pension Scheme highlights there is a need for additional controls to limit the consumer harm caused by unsuitable advice,’ SJP’s submission said.
‘We do not, however, feel a ban on contingent charging will result in better outcomes for consumers as we do not agree that the charging structure is the attributable root cause. We believe the root cause of harm is primarily a mixture of poor behaviours and poor professionalism exhibited by a relatively small number of firms who are not following the current principles and rules, not by a shortcoming of those rules.’
In 2017 SJP pulled out of giving advice to British Steel members, saying such advice had become ‘outside its risk appetite’.
SJP said a ban on contingent charging would increase the advice gap and ‘prevent some suitable transfers’ from going ahead.
Quilter said in its submission that, although contingent charging does create incentives for firms to recommend transfers, this ‘challenge’ can be managed through independent compliance checks.
‘An alternative solution that would remove conflicts of interest, without banning contingent charging, is a practice Quilter’s intermediated distribution business, Intrinsic, does.
‘This is through an independent review of all advice regarding transfers, which is undertaken by its compliance function to check all aspects of suitability.’
Quilter said the best way to manage the risks around transfers is by separating the proposed advice from the final recommendation to proceed, with the advice checked by an independent specialist.
The firm recommended MPs do not ban contingent charging and said such a ban would cause some clients to be ‘unable or unwilling to access financial advice’.
A middle ground
Another option presented to MPs came from Royal London’s submission, which said a counter proposal could be to allow DB transfer advice to be paid out of a member’s DB pension benefits – avoiding hefty upfront advice bills.
‘Assuming scheme members would be reluctant to find the relatively large cost of transfer advice from their disposable savings, an alternative would be to fund the transfer advice by a debit from the member’s rights under the DB scheme.
‘DB schemes are already familiar with applying pension debits, for example in the case of “scheme pays” for pension tax charges.
‘To give an example, suppose the CETV [cash equivalent transfer value] in a particular case was £200,000 and the cost of providing advice was £4,000. If the transfer went ahead, the member would receive a transfer of £196,000 and the advice cost would have been covered.
‘But if the transfer did not go ahead, the member would simply receive 2% less in DB benefits when he/she retired.’
The pension advice inquiry is set to continue.