Charging structures for defined benefit (DB) pension transfers had a “dramatic impact”, according to a Freedom of Information (FOI) request by pension consultancy firm LCP.
In the FOI, the Financial Conduct Authority (FCA) revealed a very steep difference in average conversion rates for clients enquiring about DB transfers.
For firms that only used contingent charging – where clients only pay for the advice received if they agree to transfer – the average conversion rate was 68.25% compared with 27.97% for those that used a non-contingent charging structure.
LCP also accused the FCA of holding off taking action on contingent charging for years.
The issue was first raised to the regulator by the Department for Work and Pensions Select Committee’s former chair Frank Field in 2018 following the British Steel Pension Scheme scandal, calling for the watchdog to ban the charging model.
At the time, the regulator said it was “difficult to prove” any “causal link” between contingent charging and suitability.
Again, in 2019, Field wrote to the former chief executive of the FCA Andrew Bailey, to present additional evidence against contingent charging and renew the call to impose a ban, which only came into force in October 2020.
Bias
LCP said the regulator’s data shows a “very dramatic” correlation between charging structure and clients’ decision to transfer.
Jonathan Camfield, partner at LCP, added: “For the first time, we can see the dramatic difference between advisers who charged on a contingent basis and those who did not.
“More than two in three members who were being charged on a contingent basis ended up transferring compared with less than one in three where the adviser was charging on a non-contingent basis.
“This is the strongest evidence to date of the potential for bias when an adviser gets paid more if a transfer goes ahead. Yet, the FCA allowed contingent charging to continue long after concerns were raised by the select committee and others.
“It is vitally important that the interests of the member and the adviser are in alignment and it would appear that on too many occasions in the past this was not the case.”
Study’s sample
In the FOI request, the FCA said that it lacked data regarding firms using ‘hybrid’ charging models, which prompted LCP to ask the regulator for sample sizes.
The watchdog then revealed 641 firms used contingent charging, 373 companies didn’t, and 335 businesses used a hybrid model.
The 1,349 businesses made up around three quarters of the market, in terms of number of companies.
