Ban on contingent charging to increase advice gap; stakes high for ‘abridged advice’

Half of advisers advising DB members think that a ban on contingent charging would result in a fall in demand for DB advice, effectively increasing the advice gap.

According to Aegon, just 21% are confident a ban would not result in demand falling. As a result, Aegon said the stakes are now high for ‘abridged advice’.

Through contingent charging an adviser only charges a client if they go ahead with the advice recommendation to transfer. However, latest data from the FCA, which found 69% of consumers were advised to transfer in the period between the introduction of pension freedoms and September 2018, has intensified FCA concerns over the potential for contingent charging to bias advice in favour of transferring.

The FCA holds a firm belief that most members would be best advised to stick with their existing scheme and increasingly has concerns that contingent charging leads to a conflict of interest, prompting it to propose a ban except in special circumstances.

The FCA’s latest paper also confirms that it is unable to allow a more personalised approach to pre-advice triage on DB transfers as this would be classed as regulated advice. According to Aegon’s research, six in ten (58%) advisers say the lack of a triage facility is harming the market.
 
This, along with the contingent charging ban, places considerable pressure on the proposed ‘abridged advice’ to plug the advice gap. Here, advisers can offer a new service to identify and ‘filter out’ in a more cost effective way DB members for whom transferring is unlikely to be suitable. The FCA has recognised its proposals are likely to lead to fewer people seeking advice but believes proposed ‘carve-outs’ for certain groups along with abridged advice will limit the impact on the advice gap.

Aegon pensions director Steven Cameron said: “The FCA has recognised the difficulty some individuals will face if they have to pay for advice upfront and we welcome the proposed ‘carve-outs’ for those with specific life shortening conditions or with significant financial difficulties.

“But this will only help a small minority. For others, the key may be to make the new form of ‘abridged advice’ workable. Firms may offer this short form of advice and while it can only produce a recommendation not to transfer, it may help weed out those for whom transferring is unlikely to be suitable, saving them money and freeing up adviser time to spend on providing full advice to those more likely to benefit from transferring.

“We are keen to work with adviser firms to explore this approach including how to make it as streamlined and cost-effective as possible.”

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