The Financial Conduct Authority (FCA) has revealed it is considering whether to implement a ban on contingent charging for pension transfer advice.
In its consultation paper on ‘Improving the quality of pension transfer advice', the FCA said: "Given the potential harm to consumers, we are considering if it is necessary to intervene in the way charges are levied for pension transfer advice. This could mean a ban on contingent charging."
The regulator said respondents to its June consultation on transfer advice highlighted conflicts of interest in the contingent charging model, whereby an adviser is only paid by a consumer if a transfer takes place.
"Some firms that advise exclusively on pension transfers have the purest form of contingent charging model, which is entirely dependant on a proportion of clients transferring," the FCA said.
"We consider this model has the greatest potential to incentivise unsuitable advice as such a firm would not be viable if it did not recommend a minimum number of transfers each year."
The regulator also suggested in its supervisory work on pension transfer advice that firms may not be managing the potential conflicts arising from their charging structures.
The FCA acknowledged the ban could raise a number of issues such as access to advice, but said these needed to be balanced against the potential benefits, such as a reduction in unsuitable advice.
It said the changes published in today's policy statement, in which the FCA abandoned proposals to drop the DB transfer starting assumption, should be sufficient to improve the quality of advice.
The regulator added, however: "We note better-quality advice that results in fewer transfers could, in itself, increase fees under contingent charging models, as there would be fewer paying customers to cross-subsidise the free or reduced cost of advice given to those who do not transfer.
"Remuneration packages which increase advisers' pay depending on the numbers of transfers that proceed may also be a driver of poor advice."
Contributing to poor advice
The Work & Pensions Select Committee had urged the FCA to ban contingent charging in financial advice following its inquiry into the British Steel Pension Scheme.
The Financial Ombudsman Service and professional indemnity insurers have also said they saw contingent charging as one of the most significant risks contributing to poor advice, according to the FCA paper.
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