The Work and Pension Committee has called for the Financial Conduct Authority (FCA) to completely rule out contingent charging, following the recent British Steel pension scandal.
Contingent charges are a fee a client pays for the financial advice they have received only if they decide to go ahead with their adviser’s recommendations.
In a letter to FCA chief executive Andrew Bailey (pictured), the committee said: “Our inquiry found that a supposedly independent financial adviser could be incentivised to give bad advice – ie suggest a DB transfer – because of the way their fees were structured: the adviser was only paid, or paid much more, if the person decided to take a DB transfer.
“We recommended that this glaringly obvious conflict of interest should be tackled by banning this ‘contingent charging’.”
Intervention not there yet
The committee is now urging the financial regulator to take action on the matter, especially since the FCA said in October last year that it would not ban contingent charging because “the evidence it has seen does not show that contingent charging is the main driver of poor outcomes for customers”.
In his reply to the committee, Bailey said the watchdog shares the same concerns and objectives but it needs to “carry out further work before intervening in this market”.
“During our meeting [in November 2018] I said that we were doing more work to understand the impact of any interventions as well as the links between the quality of advice and fee models,” Bailey added.
“I also said that our October announcement was not an endorsement of contingent charging models but an expression that we needed to get this right.”
Committee’s recommendations
In addition to its letter, the Work and Pension Committee has also listed several courses of action the FCA might want to consider:
- “The support role of the Pensions Regulator and Money and Pensions Service to any action taken by the FCA – in particular in relation to the roles of Trustees and guidance.
- The case for setting an upper limit, either in cash or ad valorem terms, for the amount of a DB transfer fee which can be received via contingent charging.
- Whether or not the government should review legislation to allow individuals in DB schemes to access part of their pension pot in order to pay for advice in a similar manner to DC schemes.
- The case for a standardised approach to triage.”
Bailey then said that the regulator is currently working on its options for intervention and that it will publish “something further in the summer”, as the FCA also stated in its business plan for 2019/2020.
For more insight on international financial, planning please visit www.international-adviser.com
