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Last line of defence: Pension guidance concerns remain despite FCA U-turn

The FCA has made a dramatic last-ditch attempt to protect savers ahead of April by introducing a “second line of defence” to support the Budget freedoms. But concerns remain about the short timeframe given to the industry to meet the new standards and the regulator’s refusal to address the “commission bias” favouring non-advised sales.

Pressure has been growing for new rules to stop unwary customers making poor retirement decisions since Chancellor George Osborne announced revolutionary pension reforms in March last year.

The Government and the regulator has until this week insisted the guidance service – which advisers are expected to contribute over £4m a year to in funding – would be enough to protect people. But now the FCA has written to chief executives of providers warning them it will be introducing new rules, effective from 6 April, without consultation. The requirements have often been called the “second line of defence” but  have now been dubbed “additional protection”.

The Government has confirmed trust-based schemes will be subject to the charges through the Department for Work and Pensions and The Pensions Regulator.

The letter says: “Providers will be required to ask the consumer about key aspects of their circumstances that relate to the choice they are making. Providers will be required to give relevant risk warnings in response to answer from the consumer.”


Under the new rules, providers will be required to ask savers questions covering their pension, health, lifestyle choices or marital status before they access their pension.

They will then have to give relevant risk warnings, such as highlighting the tax implications of taking their fund as cash.

FCA head of investment policy David Geale says the regulator’s actions were “done on our own initiative” and were not prompted by intervention from the Government.

He says: “We’re not starting on this from scratch, we’ve been working on this for some time to develop the policy. Since the Budget changes were announced we’ve been considering what the changes are in the market, looked at the market study, putting all of that together and this is what we feel is necessary at this point.”

Geale says the regulator had to wait until both the details of Pension Wise had been confirmed and the retirement income market study had been published before making the announcement.

He says: “The industry has asked for greater clarity on what they can and can’t do. 

“There’s a role for providers to play in helping people to understand the implications of their chosen route. These rules will place a requirement on providers to ensure appropriate risk warnings relevant to the individual are provided.

“Providers have always been able and expected to give risk warnings relevant to the product being talked about – there’s been nothing to stop them using questions to do that. What we’re doing here is strengthening that and ensuring providers give those appropriate, personalised risk warnings.”

Fears over Pension Wise

Last week, Money Marketing reported fears among the pensions industry and advisers that Pension Wise would become a “lottery” and could crack under the pressure of pent-up demand in April.

In addition, a test run of the service conducted by Legal & General found just 2.5 per cent of people took up the offer of free guidance, fuelling concerns people would slip through the cracks.

Hargreaves Lansdown head of pensions research Tom McPhail says while the FCA has made the right move, its decision will add to “the turmoil” in April and calls into question the role of Pension Wise.

He says: “This is a bold and strong decision from the FCA. Pension Wise was never going to be adequate on its own, some of the politicians have been blind to that.”

McPhail adds the Government’s flagship guidance service now looks expensive and unnecessary.

He says: “It begs some interesting questions of the Pension Wise service. What’s the point of it? If you are now introducing consumer protection with regulated controls on all pensions and effectively requiring providers to perform many of the same functions as the Pension Wise service, then what was the point in pouring tens of millions of pounds into setting up the service when you’re going to achieve the same protections directly from the pension providers?”

Informed Choice executive director Nick Bamford says: “Why are we spending £35m a year when it’s doubtful the service will be used?”

“It’s gross incompetence on the part of the Government to introduce freedom and choice in pensions saying we trust people to do the right thing but say we’re going to spoon feed them with guidance to make sure they make the right decision. It’s contradictory and I don’t like paying for it.”

But pensions minister Steve Webb says: “Pension Wise is not product specific, there’s a difference between coming to us to understand how the tax system works and then someone who has made a decision in principle to buy a particular product from a particular provider and then for the provider to say here’s some things that you might not have thought about. They’re very different things.

“It’s complementary, there will be some overlaps but the crucial point is there will be some people who don’t go through Pension Wise and the additional protection is for them.”

New risks

While campaigners applauded the FCA, others warn the speed necessary to introduce the changes by April introduces new risks.

McPhail says: “A consequence is that this will increase the turmoil around April. More providers will struggle to be ready in time, given the FCA has just raised the bar.”

However, Geale says providers should not have to devote too much extra resource implementing the requirements, and he does not expect the rules to be “a major obstacle” to firms offering the flexibilities by April.

He says rather than a script or set of questions, the rules are likely to be a “framework through which providers should operate so they’re clear about what sort of things they should be asking people”.

He adds: “There’s always a risk the rules may not be as simple as they could be but our expectations will be clear. In this case the benefits of speed outweigh the benefits of consultation.”

But MGM Advantage pensions technical director Andrew Tully says the regulator should have acted sooner. “People have been talking about this for ages, it would have been nice if they’d looked at it in six months ago and given us time for discussion,” he says.

“The industry needs to be given a bit of leeway in the first couple of months while it beds in.”

He adds if the FCA does opt for a framework rather than giving specific questions this will mean more work for providers.

He says: “What will now happen is providers will have to work out what they ask and when, and how they use written and telephone communications.”

Fidelity Worldwide Investment retirement director Alan Higham warns that while adding a safety net is a “step in the right direction” it does not address the more fundamental regulatory problem of commission bias.

He says: “The FCA has to consider whether its own rules are part of the problem. That might be unpalatable for them, but they could say it was a decision made by the FSA and there’s a strong case for a critical review to see if it does actually do customers any good.”

Expert view


This week’s decision by the FCA to introduce a ‘second line of defence’ requirement on pension providers is a major event. It might even be the difference between the ‘freedom and choice’ pension reforms being a success and a costly disaster.

The problem with the retirement income market was never lack of choice, it was lack of engagement. It was a two-tier market, with active consumers searching out the best deals on one side and passive ones simply accepting what they were offered on the other.

From the start it has been clear that the pension reforms are great for people who know what they are doing, who take professional advice and who shop around for the best deals. But the reforms alone do little for the other half, the unengaged and those with low levels of financial capability. In fact, by creating a far more complex retirement income market, they potentially make the situation even worse for pension savers who never got to grips with the old ‘simple’ one.

Guaranteed guidance alone cannot turn passive consumers into active ones. There are likely to be large numbers who won’t use it for a raft of reasons ranging from apathy to trust to inconvenience.

So the same consumers who missed out under the old system are at most risk of losing out under the new one too. They are much more likely to make uninformed decisions, to choose inappropriate or poor value deals, or to fall victim to pension scams. Not only are they poorer as a result, it also undermines confidence in the pension industry and the policymakers too.

That is why we have been so energetic in recent months calling for the second line of defence. It’s also why those calls have been picked and amplified by a cross-section ranging from parliamentarians to influential organisations like the ILC-UK, to charities such as Age UK to key industry figures such as Ros Altmann and many others too.

The FCA deserve credit for taking on board our concerns and starting to build the framework to ensure that additional protection is in place. The guidance service is only now taking shape and, without testing, the early users will be guinea pigs. In an ideal world guidance would solve the problems of the past but while we still aspire to perfection, let’s make sure we have an active and not a passive second line of defence, a safety net to prevent people from falling through the gaps.

Stephen Lowe is group external affairs and customer insight director at Just Retirement


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