By Fiona Tait, Technical Director, Intelligent Pensions
Feedback on the consultation paper was apparently very “polarised”, which isn’t surprise at all. I have come across many industry people who are vehemently anti-contingent charging, and a number who are equally pro.
What are the issues?
Contingent charging means that an adviser does not get paid for providing a recommendation to clients to stay in their scheme or to transfer out unless a transfer actually takes place. This, says the “anti” camp, leads to a clear conflict of interest, since the adviser will clearly stand to benefit financially if the recommendation is to go ahead with the transfer. The consultation paper also highlighted the fact that it results in cross-subsidies – those who do transfer effectively cover the costs of those who do not – and, as a result, the charge for transferring tends to be higher to cover this.
On the other hand, the “pro” camp point out that there is no actual evidence of a link between the potential conflict of interest and unsuitable advice and, furthermore, a ban on contingent charging would lead to all clients being charged and could prevent less well-off individuals from seeking advice in the first place.
In this policy statement, the FCA acknowledges the difficulty of proving a link with unsuitable advice and announces that further work is required. “Charging models are only one of the potential drivers of unsuitability, and they need to be considered amongst other factors.”
But what exactly do we mean by contingent charging?
I believe that payment should be for work done, and that a professional recommendation not to transfer is as valuable (if not more so) to an individual as a recommendation to go ahead.
However. a single sentence in the policy statement refers to the fact that it is not in fact all-or-nothing: “firms often use hybrid models where they can still charge an additional amount for carrying out the transaction if it went ahead.”
Where firms do charge for carrying out the transaction, there is an argument that they still face a conflict of interest as they get paid more if a transfer goes ahead. I would contest however, that in this instance they get paid more because they’re doing more. Not doing it would result in lower fee income, but it also results in less work.
Processing a transfer is a lengthy and often complicated procedure and clearly firms want to charge for carrying it out. However, as it is an additional service to the advice, it can and should be charged separately, and only against those who actually utilise this service. In my view this is not contingent charging, it is payment for work actually done, whereas under a “pure” contingent charging model they would be paid the same regardless of the amount of work carried out.
VAT
There is one more complicating factor. VAT rules do not define the provision of financial advice service as the work done leading to a personal recommendation; instead the tax treatment depends on whether the adviser is providing an “intermediary” service between a client and a product provider. This means, in effect, that advice is exempt from VAT if it leads to the sale of a product, however advice only services are not.
Using this definition it would seem clear that non-contingent charging for the initial analysis and advice is chargeable to VAT, whereas processing a pensions transfer to a new plan is not. Where a charge is only levied when a transfer goes ahead meets the intermediation definition and is exempt, allowing the adviser to charge the client a lower amount. One of the arguments against a ban on contingent charging for advice is therefore that it is more tax-efficient, which would appear to be true. Whether it is right or not is another matter.
So, in summary, I am still an “anti” in principle as it results in an “all or nothing” result for the adviser firm, but the hybrid approach makes sense with the initial fee in relation to the advice and recommendation, not the transfer itself.
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