The Financial Conduct Authority is set to ban financial advisers using so-called contingent charging when they advise on pension transfers.
Contingent charging is when firms charge more when they advise a saver to transfer their pension from one scheme to another than they would charge for advising a client to stay put. The regulator is concerned that being allowed to charge in this way is encouraging advisers to recommend clients transfers their pensions.
The proposal from the FCA comes just weeks after it expressed concerns about the proportion of savers being advised to ditch generous final salary pension schemes. It found that some 68% of savers who had received advice had been told to transfer out of their pension scheme. In total, pension savings worth some £82.8 billion have been transferred out of defined benefit, or final salary, pension schemes since the introduction of pension freedoms in 2015.
Defined benefits schemes are a type of pension plan where the amount you receive in retirement is related to your salary and he number of years you contributed to the scheme. As well as a guaranteed income for life, they often have particularly valuable perks such as spousal benefits and inflation-linking.
The FCA has previously said that advisers should start from the standpoint that it is not in a client’s best interest to transfer out of such schemes. Now the regulator has proposed a ban on contingent charging in a bid to clamp down on any conflict of interest where a financial adviser may only get paid if a client transfers out of their pension scheme.
In some instances, advisers can receive ongoing fees for some 30 years after recommending a transfer – which could eat into a client’s much-needed retirement income.
Is a Transfer in a Client's Best Interests?
The regulator said the ban would apply unless there were specific circumstances that mean a transfer is likely to be in a saver’s best interests. Advisers will have to demonstrate why any scheme they recommend is more suitable than the workplace scheme they are already in.
Christopher Woolard, executive director of strategy and competition at the FCA, said: “We want to ensure people receive suitable advice and drive down the number of people giving up valuable defined benefit pensions when it is not in their interests to do so.”
The regulator’s consultation, which runs until October 30, will also look at other measures around how advisers deliver advice on pension transfers, including improving how charges are disclosed and ensuring that customers understand the advice given.
Steve Webb, director of policy at Royal London, says: “It is vital that the consumer comes first when it comes to the rules around DB transfers. Some of the FCA’s proposed changes will help to reduce the risk of consumers transferring into poor value products for decades after a transfer and are to welcomed.”
He recently told Morningstar it is crucial that savers take advice before transferring out of a workplace pension. However, he warns that if contingent charging is banned, there may need to be new steps taken to ensure that transfer advice is affordable and widely available. “Until now, FCA actions have reduced the supply of DB transfer advice and raised the cost, driving some high-quality advisers with unblemished records out of the market altogether. This has to change.”
