Grove CEO and Founder, Michael C Ormond comments on the recent consultation document from the FCA on pension transfer advice and it’s potential impact not just for advisers, but for pension holders as well.

The FCA’s Consultation Document about pension transfer advice is interesting; arguably it maybe should have happened before the Work and Pensions Select Committee’s recent comments, but there you go.

A lot of what the FCA are discussing in the document is clearly responding to the committee’s line of questioning, although I would suggest the committee seemed to have some predetermined views affecting their judgement.

So, the potential big baddie now is contingent charging; this is when an adviser only gets paid if a transfer goes ahead. In the same way as an estate agent only gets paid if they sell a house, or an employment agent only gets paid if they place a candidate in a job, or a private surgeon only gets paid if they carry out the surgery, or some government contractors only get paid based on the amount of money they can save, or the insurance salesman who only get paid if they sell insurance – you get my point.

I know I’m being facetious, but my point is this, lots of businesses provide free information and advice at an early stage and only charge if something goes ahead, this is a commercial decision. The issue with pension transfers is that arguably, they carry significant risk if a transfer goes ahead, when it should not have, although you could say the same for a plastic surgeon!

An unfair situation

My worry is that banning contingent charging will mean those people with the least amount of money will be the ones who suffer again, because they can’t afford advice.

Charging a flat fee would exclude a sizable chunk of the population unfairly, although I guess someone on an MP’s salary could probably afford advice.

I know there are quite a few financial advisers and wealth managers who are happy to charge a fee to their clients and are joining the call for banning contingent charging, that’s because they have wealthy clients who can afford to pay their fees.

I bet very few of them have clients on average or below average incomes. They wouldn’t want them because they can’t make money out of them!

Mind you, they might want the beneficiaries of a recently deceased unemployed single man, who took advice to transfer his pension because of death benefits for his adult children – they’d be good clients for a wealth adviser, and they could pay the fees out of their cash investment!!

Again, I’m being facetious; I’m just trying to make a few points.

The other issue with paying a flat fee is it doesn’t consider the risk of giving DB transfer advice or the potential changes to PI costs for carrying out this type of business.

Cause for concern

What does give me cause for concern is when the FCA, in their consultation, make the following statement:

“Some consumers may not have the available cash to meet the cost of advice, although an inability to meet these costs may be an indication of a low capacity for loss, which might mean that a transfer is inappropriate for them.”

This seems to me to be a pretty massive, and inappropriate, assumption that just because you don’t have disposable income or assets (which incidentally might be why you’re transferring your DB scheme, to get access), you have a low capacity for loss. Whilst this might be true, it seems to show they’ve predetermined someone’s situation by quite some margin. Determining whether a transfer should go ahead is so much more complicated and multifaceted. It’s not just about which investment to go into, or if life assurance is needed.

Surely what should happen is to make sure the advice being given is of the very best quality it possibly can be and is regulated properly AND people on low incomes can still benefit from that expertise.

Most of the proposals the FCA have put in their consultation document are there to improve the quality of advice, and most specialist advice firms are already doing them. The ones that don’t do a decent job should be pulled up by the regulator.

What happened with British Steel is terrible, but some of those problems came about from either non-qualified advisers, non-regulated individuals or very dodgy practices, so a measured and thoughtful response is what we need.

The FCA themselves have stated that whilst too many of the files they’ve reviewed since pension freedom was introduced are unsuitable, there doesn’t seem to be any evidence that contingent charging was the problem.

The root of the problem

Do you want to know what the problem is? I’ll tell you, UNSUITABLE ADVICE.

How come IFA’s in other sectors aren’t influenced by contingent charging? It shouldn’t be about which area of advice has the greatest cost if you get it wrong, it’s about ensuring the advice being given is of the greatest possible standard and letting the customer decide how they want to pay for that advice, from an informed position.

So, make sure a Pension Transfer Specialist (PTS) is responsible for the transfer advice and initial investment advice. Make sure they can demonstrate contingent charging didn’t influence their advice – one way of doing this is whilst the firm can receive contingent charges, don’t pay the PTS a commission, reward for quality.

Make sure they have investment qualifications. Make sure they have evidence to prove the suitability of their advice. Make sure the FCA regulates advisers and maybe keep a register of advisers who have been found wanting.

Don’t exclude those on low income from getting valuable and beneficial advice. Just because a pension transfer isn’t suitable for most people and circumstances, doesn’t mean it isn’t suitable for some; and some of those reasons could be significant and life changing, especially if you are talking about death benefits.

Don’t make pension transfer advice only available for the well off. Don’t throw the baby out with the bathwater.