Let’s hope lessons were learned from the pension review 20 years ago as this time it is senior management on the line
Next month will be my 25th anniversary working in the world of regulatory compliance. While I would like to think the financial services industry has progressed since I started my compliance career, some issues just do not seem to go away. One of growing concern is whether history will repeat itself over the transferring of pension benefits from occupational schemes – and particularly defined benefit schemes – to personal pensions and Sipps.
I do not want to get too alarmist but we should recognise that the passage of time tends to dull the memory.
How many readers can remember the impact the pensions review had on the financial services industry and its clients, given it officially ended almost 20 years ago?
Can we learn from the lessons of the past? The original report into the pensions misselling scandal of the late 1980s and early 1990s did not just conclude the problem was systemic reckless activity by many financial services firms. It also concluded that most firms did not have sufficient evidence to justify the advice they had provided, hence causation assessments demonstrated that suitability could not be proved.
Back in the day, there were a significant number of firms thinking they were genuinely doing the right thing for their clients stuck in schemes facing deficit, coupled with issues such as the Maxwell/Mirror scheme fallout. However, they had failed to document the rationale for their advice well enough. Sadly, I also recall too many firms classifying their clients as “insistent” and taking significant initial commissions without stopping to think about their inherent conflict of interest.
Back in the late 1980s the then government had introduced the personal pension and the ability to opt out of the State Earnings Related Pension Scheme, all in the interests of choice and flexibility for the public. Fast forward 25-plus years and pension freedoms have liberated the consumer, with their pension pot having become a far more mobile asset. Can the industry prevent itself from repeating history this time around?
I sincerely hope it can, given the positive strides taken over recent years, with the focus on conduct and the improvements firms have made to their governance structures, training and provision of suitable advice, as appears to have been evidenced following the feedback from the FCA’s suitability review (accepting there still remains room for further improvement).
However, it requires a mindset from firms’ senior management that poses questions of its approach. Would you not seriously challenge a customer who wishes to act contrary to your professional advice and politely decline to act? It also requires firms to look at their charging structures when advising customers.
Mifid II will introduce prevention of conflicts rather than trying to manage a conflict, such as where your fee may be contingent on a customer effecting the transfer and your independence potentially compromised.
One further point to consider is this: who is the individual providing the sign-off within the firm for implementing their pension transfer proposition?
The senior managers regime, to be implemented next year, will mean for any firm involved in the pension transfer market – be it provider, platform, intermediary, or wealth manager – the focus will be on individual accountability.
Twenty years ago, too many firms were fined by then regulator, the Personal Investment Authority, for pensions review failings. This time around it will be senior individuals very much in the FCA line of sight if a pension freedoms problem materialises.
Simon Collins is managing director, regulatory, at Eversheds Sutherland