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In the dark

If the FSA does abolish RU64, it could bring a return to the bad old days, with customers puzzled over pension suitability, says comp-liance consultant Adam Samuel

RU64 ceased to have any effect on December 1, 2001 when self-regulation ended. The FSA is proposing to abolish COB 5.3.16(3) and 5.3.28, along with guidance in 5.3.29B.

COB 5.3.16(3) requires a suitability letter recommending a non-stakeholder pension to explain why the suggested product is at least as suitable as a stakeholder. For an free-standing AVC, the letter must explain why the product selected is at least as suitable as any available stakeholder, AVC or added years.

Cob 5.3.28 requires a firm promoting a personal pension scheme to a group of employees by direct offer to be satisfied that the recommendation is at least as suitable for the majority of staff as a stakeholder scheme.

The suitability guidance in Cob 5.3.29 requires advisers to compare personal and stakeholder pensions when recommending the former. When they encounter possible customers for FSAVCs, they must do a comparison with stakeholder and the in-house scheme. Firms promoting pension schemes to groups of employees must ensure the product will be at least as suitable as a stakeholder for the majority.

The FSA proposes abolishing these provisions without putting anything in their place. But the regulator has not removed the requirement to give suitable advice.

The commentary in CP05/08 makes it clear that the changes will only apply where the adviser does not have a stakeholder pension in his range. So these proposals will not apply to whole of market or independent advisers until stakeholder pensions cease to exist. Any IFA rejoicing at the FSA’s proposals cannot have read paragraph 3.22 of CP05/08: “… Removing the specific rule that requires an adviser to explain in writing to a customer why they are recommending a personal pension over a SHP or FSAVC does not mean that advisers will then be able always to ignore SHPs. Advisers, whether tied or whole-of-market, must still provide suitable advice. In a depolarised world, whole-of-market intermediaries will have to consider SHPs when advising on retirement savings.

Other advisers would need to consider a SHP if one was available within their range. However, this may provide an incentive for single-tied and multi-tied advisers to not include SHPs in their ranges. So we accept it is only for advisers committed to a whole-of-market strategy that such a constraint may be important.”

Paragraphs 1.4 and 1.6 indicate the current pension rule is exceptional only because it requires advisers to compare their recommendation with products outside their range. While stakeholder pensions exist, an IFA must recommend one if it is more suitable to the customer than a personal pension. The regulator is trying to give an unfair advantage to the tied and multi-tied sectors over their more successful and compliant competitors.

The abolition of the suitability guidance relating to FSAVCs has left a vacuum for customers. Advisers no longer have to compare FSAVCs with stakeholders and in-house schemes.

Did the regulator intend to undo the effects of PIA regulatory update 20 and the FSAVC review? RU20 made it clear that advisers could not recommend an FSAVC when the in-house scheme offered better matched or subsidised benefits.

Both the pension and FSAVC reviews concluded that any adviser who did not compare the private pension being recommended with an occupational scheme owed compensation for resulting losses.

Even with the proposed changes, advisers will still have to do a comparison with occupational scheme benefits for customers thinking of opting out or transferring. Why has the regulator dropped it for customers seeking to supplement their employer’s pension arrangements? Should customers eligible for matched or subsidised employer benefits now be recommended an FSAVC?

Since A-Day, it is more important that pension advisers consider the options open to the customer who wants to save for retirement. Flogging a front-end-loaded personal pension to a customer whose employer would provide a matched AVC benefit is immoral. It is also non-compliant.

The FSA excuses the weakening of consumer protection to customers eligible for stakeholder by saying that key features must indicate a stakeholder or employer’s arrangement could be better.

RU64 was introduced for two reasons. First, pension providers had damaged the industry by selling front-end-loaded personal pensions. If a customer stopped contributing within five years of starting some contracts, he lost everything put into the policy.

RU64 and Cob 5.3.29 ended this type of misselling and reduced the risk that customers would fail to join schemes when they became eligible. It also stopped firms selling pensions that were less suitable than stakeholder.

RU64 and its successor have never precluded the sale of a more suitable personal pension with higher or different charges.

The FSA proposes allowing tied and multi-tied advisers to recommend pensions when a stakeholder or in-house pension would be more suitable. It changes nothing for IFAs.

The regulator has forgotten that a tied adviser must not recommend an unsuitable product just because he has nothing suitable in his range.

The FSA’s proposals would take us back to the dark days when providers’ representatives, and now multi-ties, suggested front-end-loaded personal pensions to poorer customers. The pension scandals of the 1980s and 1990s put a generation off saving for retirement. The second burial of RU64 will only make matters worse. The DWP has done everyone a favour by spiking the changes.


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