Will a ban on contingent charging increase the advice gap?

Through contingent charging, an adviser only charges a client if they go ahead with the advice recommendation to transfer. However the latest FCA data, which found that 69% of consumers are being advised to transfer, has intensified the regulator's concerns over the potential for contingent charging to bias advice in favour of transferring.

The FCA believes that most members would be best advised to stick with their existing scheme and increasingly has concerns that contingent charging leads to a conflict of interest, prompting it to propose a ban except in special circumstances.

The FCA’s latest paper also confirms that it is unable to allow a more personalised approach to pre-advice triage on DB transfers as this would be classed as regulated advice. According to Aegon’s research, six in ten (58%) advisers say the lack of a triage facility is harming the market.

This, along with the contingent charging ban, places considerable pressure on the proposed ‘abridged advice’ to plug the advice gap. Here, advisers can offer a new service to identify and ‘filter out’ in a more cost effective way DB members for whom transferring is unlikely to be suitable.

The FCA has recognised its proposals are likely to lead to fewer people seeking advice but believes proposed ‘carve-outs’ for certain groups along with abridged advice will limit the impact on the advice gap.

Steven Cameron, pensions director at Aegon, commented: “The latest set of proposals from the FCA includes a plan to ban contingent charging for those seeking advice on transferring from their DB pension scheme. Contingent charging for DB advice has proven particularly contentious. Some argue it creates unmanageable conflicts of interest, while others point to a ban making advice for some individuals unaffordable. Our research shows that half of advisers think the FCA’s intention to ban contingent charging will mean demand for advice will fall, resulting in an even bigger advice gap with fewer people able to explore their options. Only 1 in 5 advisers are confident demand for advice won’t fall, avoiding an adverse effect on the advice gap.

“The FCA has recognised the difficulty some individuals will face if they have to pay for advice upfront and we welcome the proposed ‘carve-outs’ for those with specific life shortening conditions or with significant financial difficulties.

“But this will only help a small minority. For others, the key may be to make the new form of ‘abridged advice’ workable. Firms may offer this short form of advice and while it can only produce a recommendation not to transfer, it may help weed out those for whom transferring is unlikely to be suitable, saving them money and freeing up adviser time to spend on providing full advice to those more likely to benefit from transferring.

“We are keen to work with adviser firms to explore this approach including how to make it as streamlined and cost-effective as possible.”