• The Financial Conduct Authority (FCA) has set out plans to ban advisers charging based on a positive recommendation to transfer out of a defined benefit scheme
• Decision to prohibit ‘contingent charging’ comes in response to concerns over inherent conflicts of interest created by the structure
• Exemption from the ban proposed for those in serious ill-health or facing severe financial hardship
Tom Selby, senior analyst at AJ Bell, comments:
“More than four years after the pension freedoms were introduced and under mounting political pressure, the FCA has finally decided ‘enough is enough’ on contingent charging for defined benefit pension transfers.
“It has been clear for some time that the regulator is uncomfortable with both the volume of transfer activity and the quality of the advice being given in certain circumstances.
“The argument over contingent charging has always been a balancing act, with the FCA weighing up the dangers posed by the inherent conflict of interest created by the charging method with the potential impact a ban could have on people’s ability to access good quality advice.
“In particular, by banning contingent charging the regulator will make it more difficult for those with large pensions but on lower incomes to pay for advice.
“There remain perfectly legitimate reasons for a member to wish to transfer from a DB to a DC scheme, and it is positive the FCA has looked to address those who are particularly vulnerable through a carve-out from the transfer ban. The extent to which this carve-out will actually be utilised will likely depend in part on how onerous the process is.
“Ironically, the FCA’s most significant intervention in the DB transfer advice market comes as the number of people transferring out begins to fall.
“It’s important to note that while the FCA remains concerned about DB transfers as a whole, there are circumstances when it is in a client’s best interests to give up their guaranteed pension in favour of the flexibility and death benefits available through defined contribution schemes. Ensuring these people can access good quality advice is vitally important.”