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Are you clued up on RU64?

Questions about the provision of personal pension advice in the run up to the introduction of stakeholder resulted in the PIA publishing Regulatory Update 64 in March 1999. Subsequently, the guidance was helpfully supported by explanatory memoranda from the ABI.

The central issue is the importance of providers and advisers taking into account any charges or penalties that could arise on discontinuance of existing contracts when converted into stakeholder plans.

We indicated in RU64 our view that problems of this kind can be avoided if customers are advised that their contracts can be converted into stakeholder contracts without “material disadvantage” to them. We added that judgements about whether a particular recommendation is suitable and in accordance with the firm&#39s regulatory responsibilities will depend on the circumstances of each case.

Since publication of this guidance, there has been pressure for “material disadvantage” to be defined. Much of this has arisen from the marketing of products referred to as “stakeholder-friendly”, which some suggest have terms and conditions attached which are likely to be less than “friendly” on conversion to a stakeholder plan.

It has been suggested that some of these so-called stakeholder-friendly personal pensions have charging structures well in excess of the stakeholder minimum standards or that the early transfer value will be affected by penalties. Whether this is or is not the case, it does not necessarily mean the terms on eventual conversion to stakeholder will not change and so avoid any material disadvantage to the policyholder.

The introduction of stakeholder has presented firms with numerous challenges. One of these has been how best to ensure that customers have access to stakeholder pensions and are able to contribute to them from April 6, 2001. For the most part, these are commercial and competitive judgements. But there is a regulatory issue in the sense that claims made about a product sold today that are intended to reflect the terms of a product that is to be introduced in the future need to be both deliverable and delivered when that time arrives.

The message of RU64 was to avoid delivering anything that would be to customers&#39 “material disadvantage”.

We believe that, to a significant extent, firms have responded positively to the guidance. We are not persuaded that it is necessary or desirable to define either the precise nature of the disadvantage or how its materiality should be measured. It would be impossible to reflect in central guidance the individuality of the range of products available and the effect of different combinations of contractual terms and conditions.

Having given our guidance early in 1999, it continues to be the responsibility of firms to ensure they carry on the relevant business fully in accordance with both the spirit and letter of that guidance.

We would expect firms to have agreed and documented their compliance policies, in particular, the criteria against which they will judge that their policyholders will not suffer “material disadvantage” in converting existing contracts to stakeholder.

Also, firms should have put in place the necessary business control and review systems to ensure these compliance policies are adhered to on a continuing and consistent basis.

Through our monitoring of advertisements for “stakeholder-friendly” products and the early results of a survey of a sample of firms, we are generally satisfied the guidance given in RU64 is being reflected in the products being sold. Where we have found that a firm&#39s advertisements are capable of being misunderstood, we have asked firms to change them.

Where we have doubts that firms are reflecting the guidance in RU64, we have discussed the issues with the firms concerned. We continue to monitor the situation and will do so up to April 2001.

What is very important is that firms do not leave themselves exposed next year to accusations that the conversion of existing contracts into stakeholder has been to the “material disadvantage” of the policyholder. There are two steps that firms can and, if appropriate, should take to safeguard themselves – and us – against any such accusation.

First, they should satisfy themselves that their RU64 compliance policies have been fully and properly applied across the relevant business. If necessary, they should test some conversion scenarios so they have a better idea whether or not this is the case.

Firms will wish to pay careful attention to with-profits policies in the light of the regime that will apply in the context of stakeholder pensions.

Second, there is still time to take corrective action if it seems certain – or even likely – that conversion to a stakeholder contract will be to the “material disadvantage” of policyholders. Clearly, in such circumstances, firms will wish to consider how they would present their arguments to the ombudsman in the light of complaints from policyholders.

It will be in no one&#39s interested for policyholders to feel let down or for firms to have to pick up the pieces if they find that accusations of material disadvantage begin to stick.

It is the responsibility of firms to ensure this does not happen and RU64 sets the benchmark against which success or failure should be judged.

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