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FCA reveals pension freedoms ‘second line of defence’ rules

Pension providers must find out customers’ health and understanding of issues such as tax, state benefits and scams before giving them personalised risk warnings when they access their pension pots.

The FCA has published its rules on the so-called ‘second line of defence’ detailing the information providers must find out before warning customers of the risks of accessing their pensions using the new freedoms.

The rules have been introduced without consultation because “the risk to consumers in this area is great enough for additional protections to be required before the April 2015 changes”.

However, the regulator will consult in the summer on whether to “retain, modify or add to these rules”.

Firms are already required to provide risk warnings but now must personalise their communication based on individual consumers’ circumstances and knowledge.

Providers should “encourage” consumers to use the Government’s guidance service Pension Wise or seek regulated advice.

However, providers will be required to ask questions based on how the customer wants to access their savings and give appropriate warnings, regardless of whether they have taken guidance or advice.

The rules will not apply if an adviser is conducting a transaction on behalf of a client or if the provider has already given risk warnings and believes they are still appropriate.

For instance, if a customer says they want to enter drawdown the provider must decide whether they understand issues such as tax implications, sustainability of income in retirement, charges, debt, the impact on means-tested benefits and scams.

If the provider judges a customer is not aware of the implications of their actions they must give a risk warning. The regulator say it “would expect the risk warning to be prepared in advance, but tailored where necessary to the consumer’s response”.

However, it says the warnings could follow a “pre-prepared format” and could be delivered online “if suitable filtering has occurred”.

The rules come into force on the same day at the pension freedoms, 6 April, and will apply to firms running personal pensions, stakeholder pensions and selling pension decumulation products, as well as execution-only business.

FCA director of strategy and competition Christopher Woolard says: “The pension reforms give those people who are nearing retirement greater choice on what to do with their pension pots. We want to ensure that they get the right information so that they can make informed decisions about their future.”

Just Retirement has been calling for a second line of defence for those who opt-out of guidance for months.

But as recently as October, the FCA said there will be no “backstop” to prevent people making poor decisions at retirement, arguing that existing rules already protect consumers.

Just Retirement group external affairs and customer insight director Steve Lowe says: “This was a gap that could have wrecked the reforms had it not been plugged.”

The People’s Pension has called for the rules to be watered down because it says providers will struggle to comply and be ready to offer customers full flexible access to their pensions from April.

The provider says this puts savers at increased risk of scams.

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