The Financial Services Authority and PIA last week issued a consultation paper on the next phase of the pension review and redress programme launched in 1994.
The review is aimed at people wrongly sold personal pensions when they would have been better off remaining in or joining an occupational pension scheme.
The second phase of the review will focus on younger investors – those who are still more than 15 years away from retirement. So far, the review has concentrated on priority cases where the pension holder is near retirement or has died.
Research commissioned by the FSA indicates:
There are estimated to be 1.8 million investors who fall within the scope of the second phase.
Individual losses are widespread and, while smaller than for the priority groups, are material.
Total prospective losses are estimated to be in the order of £6.65bn.
Actual payment of redress may fall between £3.35bn and £5.8bn.
Associated administrative costs are estimated to be between £520m and £750m.
The FSA emphasises that, while these figures are based on research, they are nevertheless estimates which rest upon a number of assumptions about the incidence of misselling and future investor responses.
Chairman Howard Davies, says: "We believe our proposals provide a framework which safeguards the interests of investors and is practical, fair and reasonable for the industry.
"We look forward to early comments on them from the industry and from investors and their representatives. It is important that the industry gets on with this next phase of the pension review and that investors are given the redress they deserve."
In 1994-95, regulators set out a programme of review of pension transfer and opt-out business conducted between 1988-94.
A review on this scale was unprecedented in financial services in the UK and elsewhere. It was deemed necessary in the light of evidence available at that time – and since confirmed by the experience of the review – that there had been material and pervasive non-compliance in the past conduct of personal pension sales.
The review requires firms systematically to seek out and review cases falling within certain priority categories, together with other cases where investors request a review. Firms are required to give redress where the investor is found to have suffered a loss as a result of unsuitable advice.
The FSA, together with the PIA, the front-line regulator with responsibility for the substantial majority of reviewing firms, has now assessed whether further categories of business should be proactively and systematically reviewed on an industrywide basis.
The assessment has drawn, in particular, from research commissioned to establish the num ber of cases in each of the review categories and the size and incidence of probable loss, that is, any shortfall in pension on retirement when comparing personal pension benefits with the occupational scheme benefits forgone.
The results of the research show that, although losses for phase two cases are generally lower than for priority categories, they are nonetheless widespread and material.
Given the scale, incidence and materiality of the loss indicated by the research – a sizeable proportion of which the FSA and PIA would expect to be redressable, having been caused by the firm's non-compliance – it is our view that firms should be called upon to initiate case reviews for all investors affected who want them.
The proposed approach for phase two, on which the FSA and PIA are consulting, is that the key stages of the review as set out in the 1994-95 programme (information gathering, loss test, compliance test, causation test and redress) will remain unchanged, with one important exception.
The exception is the way in which firms actively seek out investors in order to bring appropriate cases within the review.
In outline, the proposed new approach to investor identification has three main elements:
Firms must write to all relevant investors to inform them about the review process and the factors which characterise their particular category and to invite them to put their case forward for review.
Investors, at the same time as putting their case forward, should provide firms with certain information about themselves which is necessary for conducting the review of their case.
The FSA will oversee a high-profile publicity campaign with a view to increasing awareness and under standing among phase two investors, both of the review as a whole and the potential implications of any decision on their part to participate, or not, in the assessment of their own cases.
It is proposed that, as a minimum, there will be a requirement to make follow-up contact with all investors who have not replied to firms.
Research and monitoring arrangements will be established to assess the level and quality of investor responses and reasons for non-response. On the basis of this assessment, further follow-up action might be required on the part of the firms in the interests of investor protection.
This changed approach takes into account previous communications between investors and firms. Many will have already completed an identification questionnaire.
It also seeks to engage investors in active co-operation with the review and, at the same time, overcome the likelihood of reduced general awareness and understanding of the review process among the phase two investors compared with investors in the priority categories.
The FSA and PIA recognise that the provision of redress to investors as a result of this approach will result in a significant call on the resources of the industry.
Research into this proposed approach suggests that the cost implications are significant.
However, our starting point is that redressable losses arising from misselling are existing liabilities which could otherwise be pursued either through regulators' complaints' procedures or through the courts.
Furthermore, without the pension review, the costs of misselling would, in the majority of cases, be borne solely by those who were mis-sold personal pensions.
The review spreads these costs among others – shareholders, proprietors, indemnity insurers, policyholders or the industry as a whole – which means that those who were missold do not bear a disproportionate burden.