Committees

“No change” in Committee's view on damage caused by contingent charging model

16 May 2019

The Committee is today publishing a further verdict on the pension transfer advice contingent charging model the FCA has so far resisted banning, against the Committee's evidenced recommendations.

As the Chair notes, the Committee's work on this “developed from the scandalous mistreatment of members of the British Steel Pension Scheme. Our inquiry found that a supposedly independent financial adviser could be incentivised to give bad advice … 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'.”

The Committee heard evidence of the problems of upfront charges contingent on the scheme member taking the bad advice—such as transferring out of a gold-plated final salary scheme at all, which the Committee has recommended there should always be a starting presumption against—and of the ongoing charges and exit fees attached to the new product, which might not in any case be suitable for their retirement plans.  It heard of pension scheme members who paid dearly for acting on contingent fee-based advice to transfer into a product they could not actually draw on in time for their clearly stated retirement plan—at least not without losing a significant chunk of their life savings to “early” exit penalties.

Despite the Committee's clear and repeated recommendations, last October the FCA announced that it would not at that stage ban contingent charging, because “the evidence it has seen does not show that contingent charging is the main driver of poor outcomes for customers.” At this point, the Committee agreed to assist the FCA in gathering further evidence - which has now all been published online - at least partly because it did not believe that was the correct starting proposition on the “urgent action” that is necessary: rather, it is for the FCA to provide evidence of a convincing alternative to a ban.

The new evidence has not changed the Committee's view at all, as Chair Frank Field describes: “The Committee has received no … compelling empirical evidence that contingent charging does not result in some independent financial advisers being incentivised to give bad advice, nor that there were suitable checks and balances in place to prevent this… Much of the evidence linked contingent charging to unsuitable advice and bad outcomes, but does not fully tackle the complexities of contingent charging or how to avoid unintended harm, particularly to vulnerable customers. A number of submissions also highlighted the fact that that contingent charging is not the only financial incentive which may lead independent financial advisers to give bad advice – an obvious example of this is ongoing fees following a pension transfer”.

As part of the series of reports and comment published in its work on Pension freedom and choice, the Committee calculated that upwards of £40 million was transferred out of the “gold plated” British Steel Pension Scheme on the advice of one firm alone - Active Wealth, aided and abetted by their sausage-and-chip-lunch proffering “introducer” firm Celtic Wealth.

The Chair closes with an offer to consider any new evidence base the FCA can come up with to support a different course of action than the ban it has repeatedly recommended: “We remain firmly of the view that urgent action is needed to protect pension scheme members from the scourge of contingent charging. If your evidence base suggests that an outright ban on contingent charging carries with it a credible and significant risk of consumer detriment elsewhere in the system, then we would be very open to looking at any proposals you might have for achieving the same outcome.”

Further information

Image: Nick Youngson CC BY-SA 3.0 Alpha Stock Images