The contingent charging model means a financial adviser only gets paid if a defined benefit (DB) transfer goes ahead.

From 1 October, contingent charging will be banned in most circumstances, the Financial Conduct Authority (FCA) has confirmed.

Apart from a few ‘carve-outs’ of the rules, this means pension savers seeking advice about a DB transfer must pay upfront, and the amount will be the same whether they go ahead or decide against the move.

As such, industry experts said accessing DB transfer advice will be even harder from October and will therefore only really be an option for those who can afford to pay. Further, given the coronavirus pandemic, many are already struggling financially.

The ban comes as the FCA found that of the 85 most active firms in the market, responsible for 43% of transfers between April 2015 and September 2018, 17% offered unsuitable advice which “remains unacceptably high”.

It also reviewed files on the advice given to British Steel Pension Scheme members and of the 192 instances, 21% appeared to be suitable, 47% appeared to be unsuitable and 32% appeared to contain information gaps.

A such, it will write to more than 7,000 former members of BSPS for whom contact details are available, who transferred out to see what advice was given and whether they want to complain.

Defined benefit rules and guidance

The FCA said the ban will remove the ‘conflicts of interest’ which arise where a financial adviser only gets paid if a transfer goes ahead. It is also expected to increase competition among ‘good advisers’.

In its policy guidance, it stated: “As most consumers would not benefit from a transfer, we expect the ban to be effective in reducing both the number of consumers who proceed to a transfer following advice and the harm that unsuitable transfers cause. A ban places a value on advice itself rather than on a transaction so helps to enhance market integrity.”

However, it acknowledged that a ban on contingent charging will mean some consumers can’t take advice because they can’t afford to pay for it. As such, it has designed ‘carve-outs’ exempting some people from the ban who might benefit from a transfer, and who would otherwise find it difficult to afford advice.

The carve-outs fall into two groups:

• Those with a specific illness or condition that causes a materially shortened life expectancy
• Those who may be facing serious financial hardships, such as losing their home as they’re unable to make mortgage or rental payments.

Instead, advisers will be able to provide ‘abridged advice’ which can only result in a personal recommendation not to transfer, or convert their pension, or they can inform the pension saver that it’s unclear whether or not they would benefit from a transfer.

‘Swaps one set of problems for another’

Andy Bell, chief executive at AJ Bell, said: “The FCA’s focus should be on making sure advice is tailored to the pension saver and delivered in a form they can understand. Banning contingent charging swaps one set of problems for another and doesn’t get to the heart of the issue. Most importantly, DB transfers will now become an option only available to the wealthy.

“Covid-19 will see the failure of businesses, which in turn will weaken or bring down final salary pension schemes.  Members of DB schemes, no matter how wealthy, should be allowed to access their right to transfer.”

Steven Cameron, pensions director at Aegon, said: “The FCA’s decision to ban contingent charging is no surprise but runs the real risk of further reducing access to advice on DB transfers at a time when the coronavirus pandemic arguably means for some individuals, this is needed more than ever.

“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.”