he Beatles sang about it and the FSA imposed it but what are the real
ramifications of being 64?
Has regulatory update 64 achieved its aim of ensuring that no one who has
taken out a pension since spring 1999 is “materially disadvantaged” by the
introduction of stakeholder? Or has it just provided another stick with
which the regulator can retrospectively beat IFAs?
RU64 was issued in March 1999 to help IFAs and insurance companies deal
with pension sales in the run-up to stakeholder, which will be introduced
in April 2000.
The advice it gave hinged around the phrase “materially disadvantaged”,
which the FSA has refused to define.
Insurers and IFAs interpreted the rules to mean that new pensionholders
should be able to transfer to stakeholder without penalty after next April.
The FSA appeared to confirm its agreement by keeping quiet and a host of
pre-stakeholder pensions allowing penalty-free transfers appeared.
But a few months ago, pension minister Jeff Rooker gave a speech in which
he questioned how stakeholder-friendly some of these pension plans are. His
objections to the plans centre on the fact that some charges are not the
explicit 1 per cent the Government envisaged but a combination of charges,
such as a 0.5 per cent bid/offer spread plus a 0.5 per cent fund management
So the FSA has waded in with questionnaires asking providers to give
details of pre-stakeholder plans.
Misys IFA services head of marketing Andrew Bedford interprets the move as
the FSA saying providers levying non-explicit charges are being “a bit
naughty”. He says: “If you look at the overall charges, they are in line
with stakeholder but not in the shape the Government wants. If you want to
be really pedantic, you could say it is not stakeholder.”
However, another IFA, who did not want to be named, suggests: “I think the
FSA is reluctantly dragging itself into this to prove there is nothing
wrong because the Government does not understand maths.”
The FSA does not look much like a reluctant participant. Spokeswoman
Jackie Blyth says: “We are doing the questionnaire as well as some other
things like mystery shopping and taking up issues with certain unnamed
firms over advertising and we will review whether we need to update the
guidance in light of this work.”
But it is not just insurance companies which are in for a hard time if the
FSA decides there is a problem with the way its advice has been interpreted
by the industry.
DBS PR manager Sue Lewis says the network's members have not been able to
sell any pensions which do not offer a penalty-free transfer since March
1999. However, the FSA will not confirm this is sufficient to protect
clients from “material disadvantage”. If the FSA discovers a problem with
insurers, it is surely only a matter of time before the spotlight turns on
those who have sold these contracts.
In the meantime, Blyth says the FSA will not and cannot come up with a
definition of “material disadvantage” for IFAs to work with. She says: “To
quantify it is not possible. Firms should know what material disadvantage
is as far as their clients are concerned.”
Lewis is confident that DBS members will comply with anything the FSA may
throw them with regard to material disadvantage. “We believe we have done
everything we can to comply with RU64. We have worked really hard on it,”
Sedgwick IFC research manager Bob Marriott says: “I think most IFAs who
have dealt with the matter sensibly have nothing to worry about. IFAs who
have taken full indemnity commission may get intotrouble if the policies do
not offer an escape route.”
But Bedford suggests thatindemnity commission is justifiable in some
cases. “The IFA needs to be very clear that the commission is for advice
and, provided you can justify it, it is very difficult to determine at what
point a client is mater-ially disadvantaged.”
M&E regulatory director Chris Stead says: “IFAs have tried very hard to
enter into the spirit of what the Government wants so clients are not
disadvantaged and, if the goalposts are subsequently moved because of the
insurance company review, they have yet again done the industry a
Aifa director general Paul Smee does not believe the FSA will take matters
so far. “I think the regulator is increasingly against doing things which
are retrospective like with endowments,” he says.
It appears the only people to be materially disadvantaged by RU64 are IFAs
themselves. RU64 has pushed down average pension charges – the reduction
in yield – from 3.4 per cent to 1.4 per cent in the first two years,
according to a London Economics report.
Clerical Medical pensions strategy manager Nigel Stammers says: “The fact
that RIYs are coming down is good for the consumer but does create an issue
over IFAs' remuneration.”
Stead says the Government is wrong to believe stakeholder is a product
which can be sold by unqualified “helpers” aided by decision trees. He
says: “It thinks stakeholder is a product which well-meaning amateurs can
get involved in and there should be no margin in it for IFAs to be paid.”
Stead says: “For people who have taken the time and put the effort into
being qualified, it is a retrograde step.”