During the Work and Pensions Committee’s inquiry into pension freedom and choice, we received worrying evidence about the financial advice given to members of the British Steel Defined Benefit Pension Scheme (BSPS). Before the BSPS wrapped up, its members had to decide what to do with their pension pot. For many, one option was to get their pot valued and move it into a defined contribution pension. This is known as a “DB transfer”. Anyone wanting to transfer a pension worth more than £30,000 must take financial advice, because it is not usually the best option. But the Committee’s report found that many members of the BSPS were given bad advice and took a DB transfer when it was not in their best interests.
Charging structures
The Committee found that a supposedly independent financial adviser could be incentivised to give bad advice—i.e. 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. This is known as “contingent charging”. The Committee recommended that this charging structure should be banned for defined benefit pension transfer advice.
This problem is not unique to BSPS members and could apply to anyone who is eligible for a DB transfer; over 100,000 people a year are taking a DB transfer on the back of potentially bad advice.
Response from the Financial Conduct Authority
The Financial Conduct Authority is responsible for regulating financial advisers, so would be responsible for introducing a ban. In response to the Committee’s report, it agreed to look at the issue and included it in a consultation which ended earlier in 2018. In October 2018, the FCA published feedback from its consultation, together with its final rules and guidance.
It summarised the pros and cons of a ban and said responses to the consultation highlighted the “complexities and interlinked issues that need to be worked through and considered”. As a result, the FCA did not introduce a ban on contingent charging and said it “needs to carry out further analysis of the issues”. In particular, there was a lack of evidence linking contingent charging to unsuitable advice and bad outcomes.
Chair's Comment
Rt Hon Frank Field MP, Chair of the Committee, said:
“The FCA has confirmed to me that it shares many of the Committee’s concerns about the scourge of contingent charging. But to tackle this, and to protect consumers from the vultures circling around their pension pots, it needs more proof of what is really happening to people. It has explained to me the complexities of contingent charging, and how it needs to carefully consider its possible interventions so as not to cause unintended harm, particularly to vulnerable customers. The FCA has said it would welcome the Committee’s help to find out more, and we’ll be happy to do everything we can to make sure we get the right safeguards in place.”
What does the Committee want to hear about?
To help the FCA with its next steps, we want to hear from anyone who has been affected by this issue.
- Have you, or someone you know, received taken advice about a defined benefit pension transfer?
- Did you have a good or a bad experience?
- Do you think this was driven by the financial adviser’s charging structure? If so, please tell us your story by Thursday 31 January 2019.
If you do not have personal experience of this issue, but have views on banning contingent charging, the Committee still wants to hear from you. In particular, relating to the following questions:
- Does contingent charging increase the likelihood of unsuitable advice?
- What would be the impact of a ban on contingent charging on consumers and firms and how could any negative effects be minimised?
- Are there any alternative solutions that would remove conflicts of interest but avoid any possible negative impacts of an outright ban on contingent charging?