The Financial Conduct Authority (FCA) should have banned contingent charging related to defined benefit (DB) transfers because there is “prima facie evidence for harm” to consumers, according to Mick McAteer, director of the Financial Inclusion Centre.
The former FCA non-executive director said there is no need for what he described as “a differentiated market” when it comes to transfers, which, he argued, the absence of a ban allows.
In contrast, the FCA said in a policy statement last week that it “acknowledged that the causal link between contingent charging and unsuitable advice is not clear-cut. It is generally hard to show a direct link between unsuitable advice and firms using contingent charging models”.
The regulator said that it would carry out further work on the matter, given the wide range of opinion both criticising contingency charges and supporting its continuation, and if there was to be action it was likely to be consulted on in the first half of 2019.
"If the FCA had moved to ban contingency charging it would also improve the functioning of the market. It has been far too slow a response"
Differentiated market
MPs on the Work and Pensions Select Committee called for a contingent charges’ ban in its report into transfers from the British Steel Pension Scheme, published in February. Adviser opinion has generally been split on the matter.
Talking to International Adviser, McAteer added: “There is no need for further research. There is enough prima facie evidence for harm and – just to be consistent – it makes sense to treat all forms of distribution the same. It makes no sense to have a differentiated market.
“The money to pay the contingent charge may not come from a provider, but the key is that is causes a conflict of interest for the adviser. It creates the risk of mis-selling as the adviser may be rewarded for recommending a sub-optimal outcome.”
Discussing the issue of access to advice, he said: “We have been around the house before with people saying the RDR (Retail Distribution Review) would make advice less accessible. The RDR has led to a much more ordered and better-functioning market. I see no difference.
“If the FCA had moved to ban contingency charging it would also improve the functioning of the market. It has been far too slow a response from the FCA.”
Further analysis
In its statement, the FCA said: “We recognised that intervening in the way charges are levied could limit access to pension transfer advice. We took into account different business models, for example, where two advisers are involved in providing advice. We were also aware of the potential for firms to ‘game’ a ban on contingent charging.
“As a result, and because of the significance of this issue to all stakeholders in the market, we need to carry out further analysis, drawing on our supervision work and considering related workstreams such as the RDR/FAMR (Financial Advice Market Review).
“It is also clear that any further changes to our rules on charging may have wider implications for the advice market and for consumers, for instance on the supply of advice.
“The responses also confirm our initial thoughts that any causal link between contingent charging and suitability is difficult to prove. Charging models are only one of the potential drivers of unsuitability and they need to be considered among other factors,” the regulator said.
