Pension advice market transformed by contingent charging ban
The Financial Conduct Authority (FCA) has published an evaluation paper assessing the impact of its 2020 ban on contingent charging for defined benefit (DB) pension transfer advice. The study examines effects on market structure, pricing, and consumer uptake of advice.
Rectifying market failures in pension advice
In June 2020, the Financial Conduct Authority (FCA) introduced a package of remedies in the defined benefit (DB) pension transfer advice market, notably a ban on contingent charging.
This model paid advisers only if clients transferred from a DB to a defined contribution (DC) pension.
The intervention aimed to rectify market failures identified in CP19/25, such as information asymmetries and advisers mismanaging conflicts of interest.
These issues often led to consumers paying excessive charges and receiving poor quality advice, sometimes transferring against their best interests.
The comprehensive package, finalised in PS20/6, included the contingent charging ban (with exceptions), abridged advice, a requirement for firms to consider workplace pension schemes, improved disclosures, measures to enhance advice quality, and new data collections.
This evaluation, conducted by the FCA's Economics Department, assesses the impact of these policies.
Adviser numbers decline, fees fluctuate
The FCA's econometric analysis confirms the contingent charging ban reduced the number of firms offering DB transfer advice; 129 firms exited in the year post-announcement, reaching 195 by September 2022.
Other market factors, including supervisory efforts and rising gilt yields, also contributed to this decline.
Revenues for full DB transfer advice fell from £236 million to £174 million.
The intervention also reversed the trend of consumers proceeding with pension transfers.
While nominal fees for those recommended to transfer increased from £5,500 to £7,100, real terms fees decreased.
Fees for consumers advised against transfer rose, as firms were required to charge consistent fees regardless of the recommendation.
Intervention yields complex results
The evaluation confirms the FCA's intervention largely achieved its primary goal of reducing conflicts of interest and improving market integrity.
However, the nuanced findings on pricing and the continued high nominal fees suggest that consumer outcomes remain a complex challenge.
While abridged advice has improved access, the full suitability of advice still requires further, more detailed assessment.