FCA calls for contingent charging ban on pension transfer advice

LONDON - FEBRUARY 27: An elderly man handles in his pension book at the post office February 27, 2003 in London. Although employees' contributions to pensions have risen by about 25 percent, he UK faces a pension crisis as employers have justified higher investment costs against contributing to pensions. Trade unions have become very concerned following the closures of many plans that would have guaranteed a fixed income upon retirement. (Photo by Graeme Robertson/Getty Images)

Britain’s markets watchdog has proposed banning financial advisers from getting paid only when a customer moves a pension pot, a practice known as contingent charging that it said cost consumers £2bn per year.

MPs called for the ban last year after accusing the Financial Conduct Authority (FCA) of being too slow to prevent “vulture” advisers from ripping off steelworkers in Wales who were faced with critical decisions over their pensions.

They singled out contingent charging, where advisers are only rewarded when recommending a particular course of action, saying it should be banned for advice on transferring a defined benefit pension.

The FCA today said it proposed the ban to crack down on conflicts of interest in the pensions sector, where consumers have recently been given more leeway to move their pots of saved cash between schemes or take out their money.

“The FCA’s supervisory work has revealed continued problems in the pensions transfer advice market,” said FCA executive director of strategy and competition Christopher Woolard.

Most consumers are advised on a contingent charging basis, with nearly 70 per cent getting a recommendation to make a transfer even though they would be best advised not to move their pension, the FCA said.

The proposed ban is part of a package aimed at improving the quality of advice for people who want to move their pension.

It also addresses conflicts of interest that arise where a financial adviser stands to receive on-going fees, in some cases for decades, once a transfer has been made.

“The FCA has proposed that advisers will be required to demonstrate why any scheme they recommend is more suitable than the consumer’s workplace pension scheme,” it said.

After a public consultation on the proposals, the FCA will issue final rules in the first quarter of next year.

Royal London policy director Steve Webb said: “If contingent charging is to be banned, the FCA and the government need to find new ways of making transfer advice affordable and available.

“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.”

Main image: Getty