The FCA has announced a ban on contingent charging as part of a package of measures to address “weaknesses” across the defined benefit (DB) transfer market.

The measures include steps to reduce conflicts of interest by banning contingent charging, as well as support for customers who are considering whether to transfer out of a DB scheme, or who have transferred out.

The regulator indicated it will implement the ban in “most circumstances” and that a ban will remove conflicts of interest that arise when a financial adviser only gets paid if a transfer goes ahead.

To address ongoing conflicts, the regulator suggested that advisers must now consider an available workplace pension as a receiving scheme for a transfer, and if they recommend an alternative solution, demonstrate why that alternative is more suitable.

FCA interim chief executive, Christopher Woolard, said: “What we have set out today builds on the work we have been doing and reflects our determination to improve standards in this market. Customers need to have confidence that the advice they are receiving is right for them. The steps we are announcing today will drive up standards.”

Commenting on the FCA’s latest move, AJ Bell senior analyst, Tom Selby, added: “While the FCA was unable to find a smoking gun in its data analysis of DB transfers and contingent charging, it has been clear for some time the regulator is uncomfortable with the inherent conflict of interest that exists within the fee model.”

Selby suggested that banning continent charging was “always a balancing act” for the regulator – which could potentially reduce the number of customers who receive inappropriate advice but also creates a risk that people who could be better off transferring are unable to pay for advice as a result.
 
He continued: “The FCA acknowledges it expects one in three people who no longer take advice as a result of its proposals could have been financially better off by transferring out of their DB scheme. But given the regulator’s starting point here is that people shouldn’t transfer, its conclusions with regard to contingent charging are not a surprise.”

Aegon pensions director, Steven Cameron, agreed the FCA’s decision was “no surprise” but suggested it runs the risk of further reducing access to advice on DB transfers at a time when advice could be needed “more than ever” during the COVID-19 pandemic.

“Some individuals simply can’t afford to pay upfront, even where transferring might have been in their interests, and with advice legally required ahead of transferring, the ban means some will be unable to explore their statutory right to transfer,” he commented.
 
“Not all advisers support contingent charging and many do accept that it could create the potential for bias in recommendations. But it’s regrettable that the FCA and industry couldn’t have found a way of addressing this conflict of interest.”

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