personal finance

FCA delays decision on controversial pension advice model


The Financial Conduct Authority has backed away from an immediate ban on a controversial charging model for pension transfer advice, which is said to have driven pension mis-selling to hundreds of Tata steelworkers.

In March this year, the FCA said it was considering a ban on advisers charging on a contingent basis, citing “potential harm to consumers”. Under contingent charging, an adviser is only paid if the client acts on their recommendation to transfer a “defined benefit” pension fund into a riskier pension arrangement.

On Thursday, the regulator said it needed to carry out more analysis and would consult further on any new proposals early next year, prompting accusations it was kicking the issue into “the long grass”.

The move comes as demand for pension transfer advice has soared, driven by record high transfer values and rule changes that have made it more attractive to move pension rights out of a defined benefit scheme to a more flexible personal pension.

Currently, anyone looking to transfer a defined benefit fund to a personal pension must seek advice from a regulated adviser if their fund is valued at more than £30,000. The adviser either levies an upfront fee or enables the client to pay from their pension fund if they choose to go ahead with the transfer.

The FCA estimates that about 100,000 transfers are taking place each year, with approximately £20bn-£30bn subsequently flowing out of company defined benefit schemes.

The regulator has previously said that customers who transfer generally pay higher fees where there is contingent charging, and that the fee model could incentivise an adviser to recommend a transfer that might not be in the best interests of the client.

In a policy document published on Thursday, the FCA said respondents to a discussion paper on banning contingent charging “were typically polarised in favour of and against a ban”. Respondents who were against a ban were mainly concerned about the availability of advice in future.

The FCA said it needed to carry out further analysis. “The responses also confirm our initial thoughts that any causal link between contingent charging and suitability is difficult to prove,” it said. “Charging models are only one of the potential drivers of unsuitability, and they need to be considered amongst other factors . . . as we look at whether intervention is necessary.”

In February, the Work and Pensions select committee called for a ban on contingent charging, saying it had been used by “dubious” advisers to “push” unsuitable defined benefit pension transfers to members of the British Steel Pension Scheme.

“Having seen the fate that befell British Steel pensioners, the committee called on the FCA to take urgent action to ban contingent charging,” said Frank Field, committee chair. “Instead, the FCA has buried this in the long grass, even as unscrupulous advisers are circling like vultures around consumers. It’s time the FCA took decisive action to prevent another mis-selling scandal.”

But others in the industry said the FCA had taken the right approach, because a ban on contingent charging could result in many people being unable to afford to pay upfront fees to secure advice.

“On contingent charging — arguably the most controversial area of DB transfer advice — the FCA is right to focus on outcomes rather than rhetoric,” said Tom Selby, senior analyst with AJ Bell, an investment platform.

The FCA said that if it considered changes “are appropriate” to the contingent charging model, it would consult further on any new proposals in the first half of 2019.



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