The opportunity behind the contingent charging ban
By David Lloyd | 29 June 2020
SUMMARY: Tenet’s Technical Services & Research Team Leader, David Lloyd, outlines the positives in relation to the ban on contingent charging, with the opportunity for advisers to review their advice process and potentially move to an even higher level of professionalism.
With the publication of PS20/6, the FCA has sought to remove the conflict of interest that may be evident through contingent charging, which it deemed to potentially incentivise advisers to recommend a transfer. Whilst the majority of advisers may not agree that the move will improve outcomes, the potential for contingent charging to be contributing to what the FCA believes is a high incidence of unsuitable advice was enough to prompt it to act.
To look at the positives, the ban on contingent charging provides advisers with the opportunity to review their advice process and potentially move to an even higher level of professionalism. As qualified specialists, clients should not be paying for a transfer but for the detailed analysis undertaken to assess whether it is in their best interests to take this life changing decision.
Many clients may not have realised they were sitting on a pension valued in the many hundreds of thousands of pounds. In these situations, advisers are often faced with clients with a preconceived notion that a transfer is in their best interests due to the large sums made available to them.
Given the current financial situation many will find themselves in, with the fallout from Coronavirus still unveiling itself, clients may see the large sums offered by pension trustees as a way of relieving some financial pressure. Clients can often underestimate the true value of the guaranteed income provided by a defined benefit pension when faced with an appealing transfer value that can be accessed as and when they please. This lump sum bias can lead to clients identifying objectives that have potentially been driven by the availability of this large transfer value, as clients begin to imagine what these funds can be used for. One has to wonder whether the increase in DB transfers in recent years has led to a corresponding increase in the number of campervans being purchased!
Clients should be under no illusion that they are paying for a review of their retirement plans and how their existing defined benefit schemes can be used to achieve their objectives. If, following this review, it can be clearly demonstrated that it is in their best interests to transfer their pension, then this should obviously be the outcome. However, clients should not enter the process under the impression that they are paying a fee to potentially facilitate a transfer.
This is an opportunity for advisers to display the worth of their advice and demonstrate to clients their expertise and knowledge. Whilst this may lead to difficult conversations and potentially disappointed clients, the challenge will be to demonstrate the value of a recommendation to remain. This will involve a full appraisal of their retirement objectives and existing arrangements and working to meet these via the lowest risk and least disruptive method possible. Whilst this may result in some advisers having to revamp their approach to DB advice, it should be welcomed and seen as a move in the right direction and an opportunity for professional advisers to thrive.
You can read the full article in Financial Adviser here.
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Tenet’s highly qualified and experienced Technical Services & Research Team offer practical guidance and support to advisers, encompassing the latest Tenet Regulatory guidance, with product, technical and market knowledge.
David Lloyd is Technical Services & Research Team Leader at Tenet