Ban contingent charging on pension transfers to stop unsuitable investments, say MPs

Published by Rachel Lacey on 17 May 2019.
Last updated on 17 May 2019

The Work and Pensions Committee has repeated its calls to the Financial Conduct Authority to ban contingent charging for defined benefit pension transfer advice.

The group of MPs, chaired by Frank Field MP (pictured top), claim that contingent charging incentivises financial advisers to recommend transfers that may not be in the best interest of their client.

This creates a conflict of interest as it means scheme members do not need to pay an upfront fee for advice, with charges only being levied if the adviser recommends a transfer.

Frank Field says: “The committee has received no…compelling empirical evidence that contingent charging 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.”

Defined benefit (DB) pensions pay members – and their spouses should they die first – a guaranteed income for life. Members who transfer out are given a cash lump sum instead to spend or invest as they so wish.

The committee’s investigation into contingent charging stems from what it describes as the “scandalous mistreatment of members of the British Steel pension scheme”.

It estimates that more than £40m was transferred out of the scheme on the advice of Active Wealth and its introducer Celtic Wealth who incentivised scheme members to attend sales pitches in pubs with offers of sausage and chips.

During its investigations the committee also heard about pension scheme members being encouraged to invest in wholly unsuitable investments with high ongoing charges and exit penalties for those that wanted to access their money.

However, despite the FCA agreeing that pension transfers are not usually in the best interests of members, it has refused so far to recommend a ban on contingent charging.

Commenting on the call an FCA spokesperson says: “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.”

The Work and Pensions Committee also says that if FCA evidence finds that a ban on contingent charging would have a negative impact on consumers, it would be happy to work with the regulator on alternative safeguards.

Steven Cameron, pensions director at Aegon says it isn’t a black and white decision.

“Contingent charging for advice on DB transfers has proven particularly contentious. While some argue it creates unmanageable conflicts of interest and should be banned, others point to a ban making advice for some individuals unaffordable. While the committee continues to call for a ban, we welcome its suggestions as to how issues might be addressed without banning it entirely, " he says.

“Aegon is particularly supportive of introducing a standard form of triage which would offer individuals some initial help to assess whether or not it is worth seeking advice on transferring. The FCA has recently highlighted that any help which takes into account personal circumstances crosses the line into advice.

"We would welcome further investigation into what more can be offered under guidance including if this can be standardised. We would also welcome increased efforts to allow individuals to pay for advice from their DB scheme in return for reduced benefits. A cap on the level of contingent charging is also worth considering.”

Mr Cameron adds that since the committee started its investigations, the Personal Finance Society has published a ‘Gold Standard’ code for pension transfer advice which covers how to manage any conflicts of interest that arise as a result of contingent charging and he would encourage the FCA to consider this before making any decisions.

He says: “Aegon has concerns that a complete ban would make the ‘advice gap’ in this area worse and should only be implemented as a last resort. We hope the FCA will now build on PFS work and explore these other potential solutions.”

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