The Financial Conduct Authority’s proposals to ban controversial charging structures were welcomed by the industry on Tuesday, but some have criticised the regulator for being slow to act.
Consumers remain at risk of mis-selling from unscrupulous advisers during the FCA’s time-wasting consultation period, which runs until October 30, the chair of the Work and Pensions Committee said.
In the paper, the FCA outlined an “obvious conflict” of interest with regard to contingent charging, where advisers only get paid if a defined benefit transfer proceeds. The cost of DB transfer mis-selling could be as much as £2bn a year, it estimated.
Frank Field, the select committee’s chair, questioned why more industry consultation was necessary. He said: “A mere 18 months after we warned that a major mis-selling scandal was erupting, the FCA is at long last lumbering into action – not action against the thieves who are stealing people’s pensions, but asking for more consultation.”
“It’s like the Good Samaritan going out to consultation before he acts. How many more savers are going to have their savings pinched from them before the FCA lifts a finger?”
The FCA is at long last lumbering into action – not action against the thieves who are stealing people’s pensions, but asking for more consultation
Frank Field, Work and Pensions Committee
The FCA identified a positive correlation between larger transfer values and the proportion of consumers recommended to transfer, suggesting advice is influenced by revenue incentives.
Mr Field said: “The FCA’s own research shows that huge numbers of pensioners are being fleeced right now by unscrupulous advisers with glaring conflicts of interest. Let’s hope they finally put an end to this racket.”
No sign of storm clouds clearing
But, whereas Mr Field said the proposed ban to contingent charging was long overdue, others expressed concern for the long-term repercussions on the advice market.
Access to affordable financial advice could be put at risk, said Royal London’s director of policy, Sir Steve Webb, with the advice market likely to shrink further.
“Some of the FCA’s proposed changes will help to reduce the risk of consumers transferring into poor value destinations for decades after a transfer and are to be welcomed… But if contingent charging is to be banned, the FCA and the government need to find new ways of making transfer advice affordable and available,” he said.
The FCA admitted the policy was likely to accelerate the shrinking of the independent financial advice market, after a rise in the Financial Ombudsman’s compensation limit – growing to £350,000 from £150,000 on April 1 this year – made it more difficult for some IFAs to find insurance.
Sir Steve added: “Until now, FCA actions have reduced the supply of DB transfer advice and raised the cost, driving some high quality advisers with unblemished records out of the market altogether. This has to change.”
In particular, the FCA’s proposals that advisers recommending a scheme must prove it is “more suitable” than the consumer’s workplace pension scheme – whereas, currently, they must only demonstrate it is “at least as suitable” – has been described as an existential threat to the IFA business model.
Mike Barrett, consulting director at the lang cat, said: “This is a shot across the bows of the adviser business model. There are a number of advisers looking at this and thinking, ‘We’re being regulated out of existence here.’”
Will poorer savers ‘fall through the cracks’?
Banning contingent charging, which allows consumers to disperse the cost of advice over multiple years, rather than paying upfront, could present a barrier for those with smaller savings.
“The proposals are likely to create a reluctance for members to take advice if they have to meet upfront costs directly, regardless of the advice outcome,” said Ryan Markham, a partner and actuary at Hymans Robertson.
Low-income pensioners, those most in need of quality financial advice on DB transfers, might be left unserved by the contracting market, he said.
“We’d hate to see a situation where these lower income individuals who potentially have the greatest need for advice fall through the cracks.”
But, overall, Mr Markham welcomed the plans, and said the FCA was taking big steps to protect consumers from acting on poor quality advice.
He added: “Although contingent charging can be helpful in allowing consumers to access financial advice that they might not otherwise be able to afford, in its crudest form it means some advisers only get paid if they recommend a transfer value.”
To ensure access to advice was not roadblocked, Sir Steve called on the FCA to work with the government on new legislation.
“If the FCA does not have the power to enable people to claim advice costs out of their DB pension rights, then the government needs to legislate to make this a right,” he said.
