The UK's Financial Conduct Authority's proposals to ban contingent charging in the vast majority pension transfer scenarios is stopping the route to necessary advice for many, according to a UK pensions consultant.
The move, originally planned to reduce concerns about a conflict of interest in situations where an adviser would only be paid if they recommended a transfer, has, however, caused even more issues, says Clive Harrison, partner at LCP.
Harrison who is one of a number of partners at LCP -a consultancy firm which advises more than 40 per cent of the FTSE100 companies - believes that the current world of contingent charging isn't working and "is resulting in significant losses for consumers".
"I do have concerns that the ban will severely restrict the availability of advisers and number of members taking advice. After all, good advice is a good thing"
In his latest blog, on the LCP website Harrison pointed that said a ban would mean some potential clients are put off transferring even if it was in their best interest, or be unable to find an adviser.
DB pension transfers
"Currently most financial advisers advising on DB pension transfers operate using a contingent charging model," he said. "Advice is initially ‘free', but charges are deducted from funds if an individual goes ahead and transfers from their DB scheme.
"With the average transfer value paid now over £400k (see LCP analysis) and advice charges of 2%-3% these fees can typically be £10,000 for many of the 69% of individuals the FCA found to be advised to transfer (and typically no fees for most of the remaining 31%). Clive Harrison, Partner at Lane Clark & Peacock
Harrison states that the FCA are proposing to remove this "obvious conflict of interest" by banning these charging structures (except where a member has evidenced shortened life expectancy or is in serious financial hardship). But adds that contingent charging isn't working and is resulting in significant losses for consumers.
"The FCA estimate that the harm created by unsuitable DB transfer advice is up to £2bn each year and we agree the loss is of this order. We therefore support the [FAC's] consultation, but I do have concerns that the ban will severely restrict the availability of advisers and number of members taking advice. After all, good advice is a good thing.
"After this proposed ban the FCA estimate that those financial advisers that remain in the market are likely to be charging fees in the region of c£3,000 for this advice. If a typical member was considering whether a transfer might be in their interest, it would seem unlikely they would be willing to commit to pay £3,000 unless they were confident a transfer might be suitable (otherwise they might perceive taking advice as paying £3,000 to be told to do nothing)."
Harrison concludes that it is likely only those members who are particularly keen to transfer, think that they are likely to be suitable and have sufficient disposable cash to pay the fees will generally take up advice. "As a result, some members for whom a transfer might be suitable will lose out," he says.
"Given the likely impact of the FCA's proposals on availability and affordability of financial advice, and strong industry calls for schemes to take a more active role in supporting their members in good decision making, we can only see this encouraging trend continuing."