As vice-chair of the body that is the consumer voice inside the FSA, Kay Blair’s opinion is more influential than most when it comes to shaping the future of financial services regulation. With some of the most significant changes ever to hit the UK financial services landscape just around the corner, the final year of her three-year tenure at the Financial Services Consumer Panel looks set to be a challenging one.
Auto-enrolment, the retail distribution review and the ban on gender underwriting are all just months away, Solvency II and the dissolution of the FSA are looming while state pension reform and defined aspiration pensions are in the wind.
Blair’s remit is widespread, covering all consumer aspects of financial services in which the FSA has a role. And with up to 10 million people set to become pension savers without their having chosen to do so, many for the first time in their life, pensions governance is shooting up Blair’s agenda.
Her overarching message is that things are not yet as they should be.
“Our key concern is that the employee is at the bottom of the supply chain. The fund managers, the platform operators, the distributors, advisers, consultants and employers all come first in pensions. The employee is at the very bottom of the pile in all this. The Government’s drive is to make employees more engaged in their pensions but the way the system works makes that a challenge.”
She says this is a particular issue for defined contribution schemes.
“In DB schemes, there is good governance but in DC, there is not. My concern is the employee is often left out of the equation. The employee is not well informed about what is happening with their pension, yet he or she is required to make critical decisions that will affect the rest of their life.”
For Blair, the key issue with auto-enrolment is the lack of advice and although she is immensely supportive of the RDR in general, she accepts the lack of advice will be made worse by the RDR. But rather than re-write the RDR, she would like to see more efficient ways for it to be delivered through the workplace.
“Employers feel they cannot give advice and that is a key concern. This is something the NAPF has been looking at – more cost-effective ways of delivering advice to employees in the workplace, which we would support. But at the moment, employees are often just given a leaflet and are supposed to make an informed decision based on that.”
‘Charging has to be transparent’
Few would disagree with the need for greater engagement between employees, or any other members of the public for that matter, and their pensions. But on the more contentious subject of charges, the FSCP is in the camp calling for greater transparency and lower costs.
Blair says: “I read a report recently that you can have up to 30 different types of fees within a pension fund. Charging has to be transparent. The opportunity for excessive charging affects the outcomes for employees significantly.”
It is an argument put forward by many critics of UK pensions – that the traditional method of gauging pension charges, the annual management charge, does not include everything a consumer would expect it to. But when asked whether this means that the AMC should be replaced with a more rigorous charging measure that includes legal and custodian charges as well as dealing fees, she stops short of support for a new yardstick.
“I would turn that question around. I would say that it is absolutely critical that there is a fair charge that consumers can understand and that they are aware of what the charges are up front. But even if you do tell people all the charges, the fact that there can be 30 different layers of charge in a pension means they can still be excessive.”
So with the reputation of pensions likely to have a key influence on the success or otherwise of auto-enrolment, what does Blair, who runs her own marketing company, think the industry needs to do to protect itself ?
“We need a real move towards engaging people in pensions. They are very boring to young people and changing that means a re-evaluation of the products. If you look at annuity rates, whose values are falling because of quantitative easing, and people not taking up the open market options, then the attraction of annuities is lessening all the time.
“My personal view is to turn that around, there needs to be some creative thinking around using elements of products such as more flexible retirement Isas that allow some money out early. I know we have just had a consultation on this but I think we will need to have that discussion again some day soon.”
Creative thinking is how some would describe pensions minister Steve Webb’s proposals for defined ambition pensions that would sit between DC and DB, with employer and employee sharing different elements of risk. “I have a lot of admiration for Steve Webb. He is grappling with a lot of challenges that need addressing. Getting people on board with the idea of saying it is worthwhile for the balance of risk to shift back towards the employer is a good start. I am encouraged he is looking at other models.”
But does she think it is a project likely to see the light of day or does she suspect it is a case of the Government covering its tracks so that when, years down the line, the auto-enrolment minimum of 8 per cent of band earnings is shown to be inadequate, it will be able to say “we told you so” and put the blame on employers for not taking forward its idea?
“I wouldn’t go that far,” she says although she accepts the project has a long way to go before any real consumer benefits are likely to be felt. “I like the idea of rebalancing the risk between employees and the employer, this idea of some sort of defined-benefit/ defined-contribution hybrid that would give a level of certainty to employers. In theory, it all sounds good but there is not enough detail at present.
“Some of what is being talked about has smoothing in it, which sounds like with-profits, and we all know how that ended. Some of the broad outlines of what it could look like point towards the Dutch model but there are still questions as to what the nature of the guarantee would actually be. And I do not really know what defined aspiration would need to look like to get the employer more interested in it. Defined aspiration will need something to be made attractive to employers if they are going to take it on board.
“At present, 61 per cent of schemes are DC and the move towards defined contribution is only going to accelerate with auto-enrolment. So I think there are big questions over how you get that pendulum to swing back the other way.”
The Financial Services Consumer Panel is an independent statutory body set up to represent the interests of consumers in the development of policy for the regulation of financial services and Blair clearly enjoys her role on the panel.
So, in what areas does Blair feel the FSCP has had real successes in recent years? “We have done a lot of work around the advice gap and the RDR. We are concerned one of the consequences of the RDR will be that an advice gap may emerge for low to middle-market advisers. Lots of consumers who have until now thought that advice was free may not be prepared to pay for it in the future.”
Does she therefore think that the benefit of more transparent commission disclosure to wealthier investors outweighs the loss of advice, and ultimately purchase of potentially beneficial financial products, to those lower income groups? “Absolutely yes, it is a net positive. The elimination of commission has to be a good thing for consumers and the removal of bias in selection of products, as does the professionalism that will be introduced by the RDR.
“But I am concerned about the lack of advice that will result from it, particularly around the open market option and retirement planning generally.”
One area where many consumers look set to lose out on account of regulation is in the field of insurance on account of the ban on gender underwriting that comes into place in December.
Most industry experts predict insurance products from annuities to motor insurance will be, on average, more expensive for everybody as a result.
Although this policy change was initiated by the European Commission rather than the FSA, Blair accepts the panel missed an opportunity to make its voice heard on this occasion.
’We need a real move towards engaging people in pensions. They are very boring to young people and changing that means a re-evaluation of the
“The gender directive is a challenge that is not necessarily going to lead to better outcomes for consumers. I am concerned that the principle of equal treatment for underwriting will one day be extended to age and disability. I am not convinced that the gender underwriting ban will lead to better annuities for women.”
And could the panel have done more? “We did not lobby against the changes to underwriting rules because of our other UK priorities at the time and because we felt there was a significant amount of lobbying being done against it. We were taken aback by the outcome. It would be lovely if we could lobby on every issue.”
Another issue emanating from Europe and one that Blair perceives as potentially problematic is Solvency II and the Panel is being considerably more proactive this time around. “I can understand the need to make sure insurance companies are economically viable but I am concerned at the effect on annuities and also the possible extension of it to defined benefit pensions in the UK. Were that to happen, it would truly be the death knell of DB in the UK. I believe the EU has yet to come to any firm decisions as to whether DB will be brought in. The panel has written to the EU about its concerns and we have asked for any evidence of what the net benefit of introducing it would be.”
Blair’s other high-profile public role is her position as co-chair of the insurance and reinsurance stakeholder group of the European Insurance and Occupational Pensions Authority, which is part of the European financial regulatory system. It is a role she says she was surprised to be elected for given the fact she is a consumer representative.
’At present, 61 per cent of schemes are DC and the move towards defined contribution is only going to accelerate with autoenrolment. So I think there are big questions over how you get that pendulum to swing back the other way’
Part of her work has seen her taking a close look at the sales processes for variable annuities, covering the way brochures and other materials are designed and how the products are explained to consumers. “These are complex products and we are very intent on making sure they are only sold with advice.”
Specific consumer issues aside, the FSCP is also involved in doing what it can to ensure consumer protection is not eroded as the regulatory landscape changes, such as when responsibility for consumer credit moves to the FSA and when the FSA itself is replaced by the Financial Conduct Authority and the Prudential Regulatory Authority.
“At the present, we are concerned that we will get to play an equal role with the FCA as we do at present and we hope to have some role with the PRA, particularly given its relation to the insurance industry.”
In fact, she is hopeful that consumers may be better off as a result of the new regime. “We really like the idea of the FCA moving to being a more proactive, intrusive regulator.”
- Runs marketing and communications consultancy
- Business Perceptions Former journalist at The Financial Times and The Scotsman
- Chair of the Scottish Housing Regulator
- Vice-chair of the Insurance Stakeholder Group of EIOPA
- Non-executive director of NHS24 – a telephone and online service providing health advice and information in Scotland
- Former member of the Scottish Consumer Council
- Non-executive director, Scottish Ambulance Service Non-executive director, Scottish Legal Aid Board