When Consumer Panel chair Sue Lewis demanded “urgent reform” of the annuities market back in December, she had no idea the call would be answered so soon.
In many ways, the pension reforms announced in last month’s Budget – which will allow anyone aged 55 or over to take their entire pension pot as cash from next year – are a more radical version of what the Consumer Panel proposed in its damming report on the annuities market at the end of last year.
The panel, which represents the interests of consumers in the development of FCA policy, called on the Government to force employers to offer a non-advised workplace annuity service and offer greater flexibility for those with small pension pots.
But while Lewis welcomes the Budget reforms, she remains cautious of the potential risks for consumers. The biggest, she argues, is the market will be “flooded” with new drawdown and other flexible products.
She says: “My concern would be people not understanding what they are buying, and that annuity providers may try to make up the lost income elsewhere.”
Chancellor George Osborne also announced in the Budget that everyone in defined contribution pension schemes will be offered “free, impartial, face-to-face advice” on their retirement options.
A consultation document published alongside the Budget confirmed the service would provide guidance, not advice.
But concerns are growing over the scope of the service and whether the Government will fail to deliver the service it has promised within the 12-month deadline.
Lewis says it is “absolutely crucial” to get the guidance service right if the pension reforms are to be a success for consumers.
She says: “The Government needs to come away from the face-to-face idea and have a complete rethink about the most cost-effective way to deliver the service. Face-to-face is not necessary for most people so the Government should not hang itself on that commitment.”
Lewis is a trustee of debt charity StepChange and says the organisation has found telephone-based services to be effective and generally preferred by the public to face-to-face conversations.
But Lewis disagrees with those who argue Osborne has misled or confused consumers by labelling the service “advice”.
“If you ask people on the street what they think advice means, not one will say the sale of an investment product,” she says. “So when politicians say ‘advice’, people take that as the common use of the term, which is actually guidance, not regulated financial advice.”
And while she notes the cost of the service will be paid by consumers, she says this is a price worth paying.
She says: “Our report on the annuities market found that one of the biggest problems was people with small pots going to non-advised annuity websites and not being aware that they were paying commission or getting a bad deal.
“There is a lot of detriment in those websites so if this service can reduce that it will be worth it.”
Lewis says the guidance needs to have a “seamless” hand-off to regulated advisers but believes this is unlikely to be suitable for the majority of consumers.
“There are not that many people walking around with money to invest,” she says. “A lot of people will want to take the money and use it for home improvements or to pay off debts. This does break the link between having a pension and buying a retirement product because there are so many different options now.”
She adds: “A typical pension pot is about £25,000 but people may have 10 times that in housing equity and they need to look at the whole of their assets.”
As a trustee of the Personal Finance Education Group, Lewis is passionate about improving consumer understanding of and engagement with financial services.
She says: “Most people are either scared of financial matters or bored – and firms add to the terror and boredom by talking in jargon and not selling their products in a way that makes people want to buy them.”
While firms need to improve their communications, Lewis argues the Money Advice Service must also do more to improve the public’s financial literacy.
She says: “I would like to see MAS have more profile and engage with consumers more in simple things, like terms and conditions.”
Lewis believes the MAS, or The Pensions Advisory Service, would be best placed to provide the Government’s at-retirement guidance. She says if MAS was to provide the service, it could reduce its advertising budget because it would have “an automatic recruiting place” for consumers.
“If 400,000 people are speaking to MAS through the service, then that spreads the word,” says Lewis.
Despite the Budget, Lewis says more reform of annuities is needed.
She says: “We would have liked to have seen the FCA take some action sooner. But regardless of the Budget, the FCA still needs to look at how well the market is operating.”
Lewis also has concerns about aspects of the RDR and argues the advice labels independent and restricted are “bonkers” and meaningless to consumers.
“They do my head in,” she says. “Consumers don’t even understand what the word advice means, let alone independent or restricted.”
Lewis adds she is worried the regulator has set the bar for independence so high that firms will be forced to become restricted.
But despite these concerns, she believes advisers have some work of their own to do on the RDR. She says: “Advisers have been fighting the RDR and it seems they are still moaning about it. Now it’s here, advisers need to seize the opportunity to promote themselves as a profession.”
SUE LEWIS CV
2013-present: Chair, Financial Services Consumer Panel
2011-present: Trustee, Personal Finance Education Group
2011-present: Trustee, StepChange
2011-present: Consumer advocate member, Chartered Insurance Institute
2005-2011: Head of retail savings and investment policy, HM Treasury
2002-2005: Deputy director, Department for Education
2000-2001: Deputy director, Cabinet Office Women’s Unity
1989-2000: Head of banking review team, HM Treasury
What is the best bit of advice you’ve received in your career?
Be yourself, but not too much.
What’s keeping you awake at night?
Nothing. Tomorrow is another day.
What has had the most significant impact on financial advice in the past year?
It has to be the RDR.
If I was put in charge of the FCA for a day I would…
Tear up the rulebook and replace it with something simpler which puts the onus on firms to deliver better consumer outcomes. Principles-based does not have to mean light touch. I would reform the language, too. Terms like ‘restricted advice’ or ‘non advice’ mean nothing.
Any advice for new advisers?
Be positive. Emphasise the benefits of what you can do for consumers.