The City regulator is under renewed pressure from MPs to ban a charging structure feared to be fuelling a pension transfer mis-selling scandal.
The work and pensions select committee is repeating its call for the Financial Conduct Authority to outlaw contingent charging, a fee structure whereby an adviser is only paid if their client acts on their recommendation.
Across the UK, thousands of financial advisers use contingent charging, which allows their clients to avoid paying upfront for advice on a defined benefit, or DB, pension transfer, which can amount to thousands of pounds.
But a 2018 inquiry by the Committee into the British Steel Pension Scheme concluded that a “supposedly independent” financial adviser could be incentivised to give bad advice because they would only be paid if their suggestion were accepted by the client, with the fee then deducted from the customer’s pension fund.
The committee recommended that contingent charging be banned to prevent what it called this “glaringly obvious conflict of interest”.
But in October last year the FCA decided against a ban, saying that the evidence it had seen “does not show that contingent charging is the main driver of poor outcomes for customers”.
In a letter to the FCA, released on Thursday, the committee said that it had received further evidence since the British Steel inquiry and its views on the issue had not changed.
“The Committee has received no submissions which provide compelling empirical evidence that contingent charging results does not result in some independent financial advisers being incentivised to give bad advice, nor that there were suitable checks and balances in place to prevent this,” said Frank Field, committee chair, in a letter to Andrew Bailey, chief executive of the FCA.
“We remain firmly of the view that urgent action is needed to protect pension scheme members from the scourge of contingent charging.”
The committee said it had heard of pension scheme members who “paid dearly” for acting on contingent fee-based advice to transfer into a product they could not actually draw on in time for their clearly stated retirement plan without losing a significant chunk of their life savings to “early” exit penalties.
Baroness Ros Altmann, a former pensions minister, said she supported an immediate ban on contingent charging.
“I completely agree with the committee and was disappointed last year when the FCA did not ban contingent charging. It is difficult to imagine how this fee structure — where an adviser only gets paid if the client acts — cannot influence the advice given.”
The MPs’ letter comes a week after it was revealed the FCA is investigating 30 firms and individuals for poor pension transfer advice or scams that are putting people’s retirement savings at risk.
Since 2015, more than 200,000 savers have opted to transfer a DB pension — which provides a secure, indexed retirement income — to riskier pension arrangements.
But MPs? fear there could be another pension transfer scandal after the FCA’s own market analysis found that less than 50 per cent of transfer advice it reviewed was suitable, or right for the customer.
An FCA spokesperson said: “We are taking account of this evidence as we consider what intervention might be appropriate in this area. We agree with the Committee about the need to consider all the facts to address the potential harm in this market. We plan to say more on this in the summer.”