In a flourish to rival the Easter Bunny, the FCA recently left the industry a basket of publication goodies to enjoy over the spring break.
Chief among them was the long-awaited response to its consultation last June on advising on pension transfers. This included the final rules for the new transfer value comparator (TVC) and appropriate pension transfer analysis – a package designed to replace the current transfer value analysis (TVAS).
But the FCA feels there is further work to do. Partly in response to the issues raised in last year’s consultation, and partly in response to findings from its supervisory work, the regulator has also launched another consultation to further improve the quality of pension transfer advice.
This latest consultation covers three main areas. The first is to enhance the qualifications held by pension transfer specialists (PTSs) so they have to hold an investment qualification. This makes sense given the increased robustness around the role the PTS plays in checking the entirety of the transfer recommendation.
The second area is all to do with the advice process, and covers areas such as how an adviser works with an outsourced PTS, in what context the adviser can offer triage services, and introducing guidance on how to assess clients’ attitude to investment risk. There are many interesting discussions to be had around these proposals and over the general direction of travel of FCA policy here.
But it is the final section which has bagged all the publicity. The FCA is considering a ban on contingent charging.
It’s interesting it has decided to grasp this nettle. The regulator has come in for increasing criticism about its perceived reluctance to discuss contingency charging, on the basis contingency charging is allowed under adviser charging rules.
The growing maelstrom around the role of contingency charging in unsuitable transfer advice has rattled the FCA's cage. But the regulator doesn’t seem inclined to go for the knee-jerk reaction of simply banning it.
Initially the proposal seems simple. If an adviser only gets paid if a transfer goes ahead, then they may be more inclined to advise people to transfer. So ban it and remove this bias.
However, the FCA maintains this isn’t straightforward and the problem needs unpacking. It wonders if it can just ban contingent charging for transfer advice only due to the special circumstances involved. A pension transfer is an irrevocable decision, involving the potential loss of safeguarded benefits and often a lack of expertise among savers when it comes to investments.
But the regulator also believes the situation is made more complex by the fact there are often at least two elements to the advice given – advice on the transfer, and advice on the proposed destination and the investments within that scheme. There can also be two advisers involved in the process, making it even more complicated.
If contingent charging was banned on transfer advice alone, the FCA worries that some advisers would repackage their charging structure to, in their words, "game" the system. There would be a charge regardless of whether the transfer goes ahead or not, but also backloaded charges on the investment advice and any implementation fees. This would mean there is still a potential bias to encourage people to transfer, particularly where one adviser is managing the entire transfer process.
The access to advice issue
Another problem is whether banning contingent charging will have implications for consumers’ ability to access advice, and I think it probably would. Many people struggle physically or emotionally with paying a big upfront fee for advice they didn’t particularly want, only to be told something they didn’t particularly want to hear. Cut out contingent charging and you may cut out part of the market to advice.
Some may argue that’s not necessarily a bad thing as these are the very people we should be dissuading from transferring, but I don’t agree. I want to see an expansion of access to advice, not the reverse.
The FCA argues the changes it wants to make to triage services will help with this dilemma. But I’m not so sure. The new proposals for triage services – to make it guidance-only, with no advice and completely unrelated to a client's personal circumstances – is only likely to result in fewer people having an open and honest conversation with an adviser at the start of the process.
If the FCA believes contingent charging leads to bias and should be banned, it also needs to face up to the quandary of how people can pay for the advice.
None of this is easy. This is a complex piece of advice, and should rightly be charged as such. But everyone needs and deserves advice, and we need to work towards achieving this.