It’s a controversial subject; one that has troubled the Financial Conduct Authority (FCA) for a while now. Given the advantages of a defined (DB) pension scheme, they believe too many people are still opting for a final salary pension transfer – and this could, in part, be due to the way advisers charge for their services.
Last year, the FCA announced proposals to potentially ban the contingent charging model. And, after a lengthy consultation process, it’s now been given the go-ahead. In their recent policy statement (PS20/6), they set out new rules for pension transfer advisers, including a ban on contingency fees that will start on 1st October 2020.
Here we explore this change and what it means for consumers.
What is contingent charging?
Essentially, contingent charging is a model in which financial advisers are only paid if – based upon their pension advice – a final salary pension transfer actually proceeds. The client doesn’t have to pay upfront for the advice they’re given. In a way, they’re advised for free, and are only expected to pay for the services they received if or when they decide to make the transfer.
Why has it been banned?
Some people argue the contingent charging model is beneficial, as it allows everyone – regardless of their current financial situation – to gain access to free pension transfer advice.
But the problem is, it creates a huge conflict of interest.
The adviser only gets paid if you agree to go ahead with the transfer. They have a vested interest to get you to sign on the dotted line and switch over your pension pot, and – even if it’s done subconsciously or unintentionally – this could potentially influence their recommendation.
According to the FCA, approximately 69% of consumers who receive pension transfer advice agree to make the transfer – which seems unreasonably high, given that such transfers are usually a bad idea. It is thought that many of these are driven by contingent charging. And as a result, to reduce the number of people wrongly “giving up valuable defined benefit transfers”, the ban has been created.
How does the ban on contingent charging work?
From now on, financial advisory firms will have to charge the same amount for all pension transfer advice – irrespective of whether a final salary pension transfer is recommended or not.
There are a few exemptions to this rule. For example, the contingent charging model can still be used for consumers with an illness that shortens their life-expectancy and those facing significant financial hardship (e.g. if they’re about to lose their home). But to prove that an exemption is justified, the adviser will need to obtain suitable evidence, such as medical records or bank statements.
Rather than offering ‘free’ advice as part of a contingent charging model, advisers are now encouraged to provide an ‘abridged advice service’ instead.
This is a way for people to get initial guidance at a more affordable cost. It’s an introductory chat, in which the adviser will gather information and determine if you’re a viable candidate for a transfer. If you are, they will proceed with the full advice process. But if not, you can rest in the knowledge you have been given suitable advice – that is uninfluenced by a conflict of interest – without breaking the bank.
Received advice under the contingent charging model?
If you believe you have been given poor pension transfer advice – driven by the benefits of contingent charging – you could be entitled to claim for compensation.
This claim can be made in several different ways.
For example, you can claim for free to the Financial Ombudsman Service (FOS), the Pensions Ombudsman (TPO), or the Financial Service Compensation Scheme (FSCS). If you have it, you can claim on your personal insurance for financial mis-selling or directly to the firm with which the claim relates. Or, you can recruit the help of a claims management company, such as Money and Me.
Our team of specialists have excellent knowledge of the contingent charging model and how it can influence pension transfer recommendations. They know the signs and, after reviewing your case, will be able to advise on your eligibility to claim and take care of the full claims process for you.