The pension freedoms have given people greater autonomy over what they do with their retirement savings, as well as provided a useful boost to tax revenues in the era of austerity. However, with these reforms also came a greater opportunity for consumers to be scammed out of their pension savings by being encouraged to invest in fraudulent or unsuitably risky schemes.
Pension scams had been on the rise before ex-chancellor George Osborne’s freedoms but there is no doubt his reforms gave them a boost. So the industry was pleased to hear new Chancellor Philip Hammond announce further action on scams in last year’s Autumn Statement.
Following on from this, the Treasury and the Department for Work and Pensions have issued a joint consultation seeking views on their proposals to prevent pension scams. There are three key measures suggested: a ban on cold-calling, limiting the statutory right to transfer, and making it harder to set up fraudulent schemes.
The ban on cold-calling has received the greatest amount of media coverage, and we understand there is sympathy for a wider ban on communications on pension transfers within the Government. We favour a cold-calling ban as it sends a strong signal to consumers to put the phone down as soon as they realise the call is about their pension.
The consultation acknowledges it does not want to restrict legitimate use of cold-calling, yet the devil is in the detail. We understand from members that, at least in the early days of setting up a business, the use of lead generators or of referrals from existing clients can be helpful in building up a client list. At present, the ban on cold- calling would cover these perfectly reasonable business practices and would constitute a barrier to entry for the new firms that undertake such activities.
The paper also notes some scammers offer “free financial advice”. We believe caution needs to be taken in explicitly mentioning this as a scam indicator. While it is true there is no such thing as free advice, we know some advisers do promote the free initial conversation (as no fee can be charged until it is agreed with the consumer) as part of their marketing.
Another area the paper covers is how to make it harder for fraudsters to open small pension schemes. One suggestion is to bring back pensioneer trustees on small self-adminsistered schemes as an extra layer of protection for consumers.
However, advisers have told me of their concerns that pensioneer trustees might take a similarly cautious approach to SSAS use to that of Sipp trustees, and this could have adverse consequences for small businesses that legitimately use their SSAS as a loan to cover, for example, business capital expenditure.
More to be done
There is more that could be done by the Government and regulators to clamp down on fraudsters, including pension scammers. Cobs 4.12 currently allows for financial promotion of non-mainstream pooled investments to high-net- worth individuals and certified or self-certified sophisticated investors.
The current regulation is insufficiently stringent, as retail consumers are ending up investing in unregulated products and then claiming compensation. Having a certain amount of wealth is no guarantee that you have the understanding necessary to invest in complex or risky investments, so high-net-worth investors should be completely barred from investing in non-mainstream pooled investments.
What is more, allowing an adviser to certify someone as sophisticated – thereby allowing rogue advisers to encourage the same individual to invest in unsuitable products – is a loophole that should be closed.
Protecting consumers from the fraudulent schemes that accompanied the pension freedoms is an important task. Advisers should take the opportunity to feed into the consultation and any future proposals to ensure measures that strike a balance between consumer protection and enabling a thriving adviser sector.
Caroline Escott is senior policy adviser at Apfa