Contingent Charging – Would a ban be the thin end of the wedge?

contingent-charging
  • Author : Bill Vasilieff
  • Date : 17 Feb 2020

As the ban on contingent charging for Defined Benefit transfers goes through the motions of consultancy with the FCA, it looks extremely likely that the ban will end up being introduced. The FCA are clearly very concerned about DB transfers and start from the basis that a transfer is not in the customer’s best interests until proven otherwise. No doubt the FCA recall the pension mis-selling scandal occurred in the late 1980s and early 1990s, when as many as two million people were wrongly advised to opt-out of occupational schemes and take out personal pensions following the government of the time striving to roll back the state and reduce the burden of tax and regulation in many areas. Paradoxically pensions largely saw the opposite, with a huge increase in regulation and taxation which has had the impact of killing off defined benefit pensions for nearly all but the taxpayer funded public sector.

For those that were around at the time, that scandal was largely concerned with opting-out of the company pension while still employed, with the result that the company’s future pension contributions to the employee were lost which is clearly not good news. The current boom in DB transfers is quite different as it seems these transfers are largely from leavers who have a deferred pension with a previous employer and with the enormous multiples available, sometimes up to 50 times, a transfer looks a very good deal indeed (I know I have taken mine!).

The ban on contingent charging is another nail in the transfer coffin as there is a lot of work involved for advisers and very few people will want to go through the cost of taking advice which may result in a recommendation so stay where you are. The result is that many people who would have benefitted from transferring won’t do so and therefore will actually lose out.

The other impact of this ban is that it is the thin end of a very big wedge and will see the last remnants of ‘commission’ disappear. It is not hard to see that once contingent charging disappears and fees are established on DB transfers then the next thing under attack will be that the ban will be extended to all investment products and we will live in a world where advisers live purely on fees; this is something that various regulators have been dreaming of for decades. Whether it is a good thing or not only time will tell, but it looks likely that the ‘advice gap’ will only grow.

The concept of ‘contingent charging’ exists in many guises and in numerous products and services that customers buy, but for financial services it may soon be a thing of the past and it will have enormous ramifications for our industry.

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