- Shocking FCA findings that many advice firms had no professional indemnity cover, leaving customers unprotected against mis-selling.
- Waiting till October 2020 to ban Contingent Charging, downplayed customer protection and put consumers at greater risk.
- The ban was needed long ago, as it was obvious that advisers who only get paid if they advise customers to transfer, can be biased towards advice to transfer even if unsuitable.
The FCA has just released updated data about Defined Benefit pension transfers from 2018 to March 2020, showing that the majority of advice firms used a Contingent Charging fee structure when advising clients. This means they only earn a fee if the transfer goes ahead and, unsurprisingly, the majority of their customers were advised to transfer. Here is a link https://www.fca.org.uk/data/defined-benefit-pension-transfers-market-data-october-2018-march-2020
FCA delayed introduction of Contingent Charging ban to October 2020: It was always obvious, surely, that advisers who only earn money if their customers transfer, will be biased to advise them to transfer. This bias could mean customers being told to move out of their guaranteed pensions, even if it might not be suitable for them. The FCA discussed banning such charging structures in 2018, the Work and Pensions Select Committee recommended a ban, yet the Regulator announced it wanted to gather more evidence, rather than acting immediately.
Customer interests were not prioritised and many will have transferred unwisely but their decisions are irreversible: Tens of thousands of customers were advised to transfer out and may live to regret their decision. Contingent charging seems hard to justify. Commission on financial products, which was a root cause of so many financial scandals which rewarded salespeople for selling products regardless of suitability, was banned long ago. It is clear that paying an adviser only if the transfer goes ahead must skew incentives, but what can customers do if they have been wrongly advised?
Shocking absence of Insurance Cover means customers may have no recourse to compensation: The regulator’s data show that 9% of firms (119 companies) advising on transfers failed to respond to the FCA survey. Of the 91% who did respond, a shocking 9% had no Professional Indemnity insurance and 28% had only limited cover. This means customers who have been wrongly advised may find they have no recourse to compensation, especially if the firm goes out of business.
Advice should be charged like other professions – paying for the time of an expert: Good advisers are professionals who spend years developing their skills and training, offering huge added value for customers. They should charge for the advice, without being biased to any outcome.
If people do not want to pay for advice, they will just stay in their scheme: Requiring people to pay some thousands of pounds for a detailed analysis of the risks and benefits of transferring, in light of their own individual circumstances, may put many people off, but then the worst that happens is that they do not transfer – a lower risk outcome for all concerned.
The concept of abridged advice could be funded by the £500 pension advice allowance: In fact, the Government introduced a little-known and hardly-used £500 Pension Advice Allowance, permitting pension members to use scheme assets to pay for up to £500 of advice. DB pension trustees could even consider a ‘scheme pays’ arrangement that would pay this sum, or even higher amounts, by reducing the eventual DB pension later if the member stays in the scheme.
QE has inflated transfer values and there are circumstances where members should transfer but not without advice: DB pension transfer values have soared following central bank Quantitative Easing policies, which leads to eye-watering sums being offered. For those in poor health, or who are single or who have only a small pension entitlement in a scheme, there are many benefits to transferring. A few £20 a week DB pensions could be worth over £40,000 each and from a financial planning perspective, transferring some small pensions, if they have other guaranteed income, can be sensible given the tax advantages of Defined Contribution relative to Defined Benefit schemes. If the individual has a large DB entitlement elsewhere, small amounts of added income are unlikely to materially improve living standards in later life. But each person needs advice before making this irreversible decision and advice should not be biased towards them acting against their best interest.
Need Regulators to be more proactive and act faster to prevent obvious consumer detriment: I do hope the Regulators will move towards a more proactive approach to protecting consumers, rather than the current tendency to be only reactive. Acting long after thousands of people have been put at risk is not in the public interest.