Contingent charging ban affected market size but not fees
Image: FCA
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The Financial Conduct Authority’s 2020 ban on contingent charging for defined benefit transfers reduced the market volume for this type of advice but had little effect on fees, the watchdog found in an evaluation paper published on Thursday.
After the DB transfers scandal around British Steel and others, the FCA consulted on proposals to ban contingent charging in 2019 and announced a ban in June 2020, effective from 1 October that year.
In a new paper, noting that other factors like rising gilt yields were also at play, the regulator has said its intervention has largely worked, reducing the market size for DB transfer advice.
However, it admits that the effect on pricing was not as great as it had hoped. “The volume effect has been far greater, with very little impact on fees,” the regulator writes. “Fees for advice were stickier than we expected, and our initial expectations of price reductions were too optimistic.”
The number of firms reduced by about 129 in the year after the announcement of the intervention and 195 firms up until the end of September 2022, the FCA said, with firms now less likely to offer DB transfer advice. It adds that there is evidence to suggest firms started leaving the market when the ban was announced.
Revenues were £236m in the year before the ban and £62m lower at £174m in the year after.
“This reduction is smaller than our estimated range in the cost benefit analysis,” the regulator noted.
It puts this down to several factors, including that firms left the market in anticipation of the ban and the total industry revenue for full DB transfer advice had already started to decline. The availability and higher cost of professional indemnity insurance also contributed to firms leaving the market, it said. Furthermore, where advice charges were expressed as a percentage of transfer values, these may have been affected by falling transfer values from rising gilt yields over this period.
Before the ban came in, the FCA expected an estimated average reduction in the price of full DB transfer advice of £2,500 to £3,500 for consumers that transferred, and a rise in the price for those that did not transfer.
“However, these fees did not decline as we expected,” it writes.
Nominal fees per consumer that were recommended to transfer increased from about £5,500 to £6,900 in the two years before the ban, and after the ban reached a peak of about £7,300 in March 2022 before falling back slightly. In real terms, fees per consumers that were recommended to transfer peaked in October 2020 and fell in the two years after the intervention.
In the 2020 intervention, the FCA had included a number of measures, such as:
After the DB transfers scandal around British Steel and others, the FCA consulted on proposals to ban contingent charging in 2019 and announced a ban in June 2020, effective from 1 October that year.
In a new paper, noting that other factors like rising gilt yields were also at play, the regulator has said its intervention has largely worked, reducing the market size for DB transfer advice.
However, it admits that the effect on pricing was not as great as it had hoped. “The volume effect has been far greater, with very little impact on fees,” the regulator writes. “Fees for advice were stickier than we expected, and our initial expectations of price reductions were too optimistic.”
The number of firms reduced by about 129 in the year after the announcement of the intervention and 195 firms up until the end of September 2022, the FCA said, with firms now less likely to offer DB transfer advice. It adds that there is evidence to suggest firms started leaving the market when the ban was announced.
Revenues were £236m in the year before the ban and £62m lower at £174m in the year after.
“This reduction is smaller than our estimated range in the cost benefit analysis,” the regulator noted.
It puts this down to several factors, including that firms left the market in anticipation of the ban and the total industry revenue for full DB transfer advice had already started to decline. The availability and higher cost of professional indemnity insurance also contributed to firms leaving the market, it said. Furthermore, where advice charges were expressed as a percentage of transfer values, these may have been affected by falling transfer values from rising gilt yields over this period.
Before the ban came in, the FCA expected an estimated average reduction in the price of full DB transfer advice of £2,500 to £3,500 for consumers that transferred, and a rise in the price for those that did not transfer.
“However, these fees did not decline as we expected,” it writes.
Nominal fees per consumer that were recommended to transfer increased from about £5,500 to £6,900 in the two years before the ban, and after the ban reached a peak of about £7,300 in March 2022 before falling back slightly. In real terms, fees per consumers that were recommended to transfer peaked in October 2020 and fell in the two years after the intervention.
In the 2020 intervention, the FCA had included a number of measures, such as:
- banning contingent charging, with exceptions for consumers with certain personal circumstances;
- introducing abridged advice;
- requiring advisers to consider an available workplace pension scheme as a receiving scheme for a transfer.
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