Advice firms that use contingent charging have been far more likely to recommend a DB transfer than those using non-contingent fee options, according to new FCA data.
LCP obtained this information following a freedom of information request. The FCA’s data showed where firms used contingent charging, more than two in three members seeking advice about a DB transfer ended up moving their pension — a conversion rate of 68 per cent.
In contrast, less than one in three members seeking advice from firms using non-contingent charging switched out of a DB pension — a conversion rate of 27 per cent.
Contingent charging means that clients are only charged for the advice given if a transfer goes ahead. This fee model was banned by the FCA in October last year, although it is allowed in very limited circumstances.
Action by the regulator came two years after MPs on the work and pensions committee called for a ban on contingent charging because of conflicts of interest. Its report into the issue looked at the high numbers of people who had transferred out of the British Steel pension scheme. It highlighted contingent charging as being a “key driver” of poor advice.
At the time the FCA said it would keep the matter under review, arguing that the evidence was not clear cut and commenting that “any causal link between contingent charging and suitability is difficult to prove”.
LCP says this is the first time this data has been published on this issue and it shows the correlation between charging structure and the extent to which those who seek DB transfer advice end up transferring.
Jonathan Camfield, a partner at LCP says: “For the first time, we can see the dramatic difference between advisers who charged on a contingent basis and those who did not.
“More than two in three members who were being charged on a contingent basis ended up transferring compared with less than one in three where the adviser was charging on a non-contingent basis. This is the strongest evidence to date of the potential for bias when an adviser gets paid more if a transfer goes ahead. Yet the FCA allowed contingent charging to continue long after concerns were raised by the Select Committee and others.
“It is vitally important that the interests of the member and the adviser are in alignment and it would appear that on too many occasions in the past this was not the case”.
According to the FCA data there were 641 firms using contingent charging and 373 advice firms which offered other fee structure. There were a further 335 advice firms that used a mixture of charging structures which were excluded from these figures.
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