The Pension Schemes Office is to clamp down on IFAs operating in the insured loanback market after accusing them of abusing the facility.
Loanbacks allow clients to take out a loan from their pension policy, provided it is repaid before retirement.
The PSO announced a review of its guidelines in November after it raised fears that loans were not being used in the right way. It is also concerned that companies in financial difficulties are taking out loans.
The PSO feels that life offices have failed to chase up borrowers who have defaulted on interest payments because it costs too much.
It is to issue draft guidance which will tighten the loanback regulations. The move follows high-level talks between the ABI, Investment and Life Assurance Group and the PSO in December.
In future, the PSO wants life offices and IFAs to notify it when a borrower fails to make interest payments for 90 days. The PSO is considering imposing fines for failure to report a defaulter.
Commercial Union pensions technical marketing manager Iain Oliver says: "We feared the facility would be withdrawn totally but it remains to be seen what the plans on defaulted loans will mean for life offices and borrowers."
M&G pensions marketing manager John Page says: "Life offices which are int erested in the market will have to start to look closer at the interests of scheme members now."