Contingent charging on BBC Radio 4 Money Box
I had the pleasure of being interviewed about contingent charging for BBC Radio 4 Money Box at lunchtime yesterday.
Last week saw the publication of a report about the British Steel Pension Scheme, by the Work and Pensions Select Committee.
Within the report was a call by MPs for the Financial Conduct Authority (FCA) to ban the practice of ‘contingent charging’, which the committee considered to be “a key driver of poor advice”.
I spoke to a journalist from the FT on Wednesday night to offer some comments on this recommendation, which featured in this article on Thursday morning.
The publication of the report, and this recommendation in particular, sparked a healthy debate among financial planners on Twitter.
On Saturday morning, as I was packing things up at Cranleigh parkrun where I had been Run Director that morning, I received a call from the BBC asking if I could step in as a guest at lunchtime to talk about a possible contingent charging ban for defined benefit pensions advice.
After confirming that a producer could give me access to my nearest BBC contribution studio, just up the road at the University of Surrey, I made a few notes and jumped in the car to arrive twenty minutes before the broadcast.
You can listen to the episode at http://www.bbc.co.uk/programmes/b09rwdjc; the feature about the British Steel Pension Scheme and contingent charging is the first item, with a report from Tony Bonsignore and then my conversation with presenter Paul Lewis.
Paul started by asking me to tell listeners how contingent charging works.
I explained that contingent charging is a way for an adviser to charge a fee if a client buys a financial product. In the case of the British Steel Pension Scheme, the adviser only gets paid if they recommend their client transfers their defined benefit (final salary pension) cash equivalent transfer value to a personal pension arrangement.
Paul then asked how this contingent charging related to commission, which was banned for retail financial products when the Retail Distribution Review was introduced at the end of 2012.
I told Paul that contingent charging is very similar to what we used to know as commission. If an adviser is working for free, but only gets paid when they recommend a transfer, in my mind that is the same as a commission.
Paul asked me why the Financial Conduct Authority allows contingent charging.
I explained that the Financial Conduct Authority have previously said they are not a price regulator, so they have steered clear from setting maximum limits on what advisers can charge or the charging structures different advisers use.
Paul then asked whether the Select Committee recommendation to ban contingent charging is likely to make the Financial Conduct Authority look again at this issue.
I said I thought they should look at it more closely now, after coming late to the party on the whole fiasco around the British Steel Pension Scheme. I also explained that contingent charging is only one driver behind the bad advice we’ve seen in this particular case.
Paul said we tend to think of financial advisers as being heavily regulated, but mis-selling is still taking place, as evidenced by this report from the Select Committee.
I confirmed that we are, as advisers, heavily regulated. We’re subject to a massive rule book but also guidance, with regulation an integral part of what we do.
But there will always be bad apples and sometimes the FCA and other regulators are slow to intervene at a stage early enough to prevent consumer detriment.
Mis-selling on the scale that appears to have happened around the British Steel Pension Scheme should not have happened in such a heavily regulated environment. I told Paul we would like to see professional bodies taking a bigger role, perhaps coordinating the peer review of cases where contingent charging is used, to make sure that the advice given was genuinely in the best interests of the client.
Paul finished by asking about FCA plans to change the default position on defined benefit pension transfers, which is assuming they will be unsuitable.
I said that I’m not in favour of default positions and believe advice should always be about the individual, their own goals and objectives.
But we recognise that defined benefit pension transfers are a high risk advice area and it’s important the FCA gives very clear warnings and guidance about what they expect to see.