The report said that while the market is likely to adapt, offering a new range of financial products for those approaching retirement, it is crucial that these products are not defective. In the case that they were, the reputation of the financial services industry, which has suffered severe damage in recent years from large scale mis-selling, would be further tarnished.
The FCA has now been given new powers to intervene early, in advance of detriment occurring. However, the Treasury Committee reports that in practice, this will be extremely difficult to accomplish without creating other forms of consumer detriment. In particular, it will be essential to avoid stifling market innovation and the use of these new powers will be a major test of judgement-based regulation.
The Committee noted that it welcomed the greater flexibility and choice provided by the Government’s proposed pension reforms.
It also noted that consumers will need 'considerable support' in navigating a market which is undergoing major change and in which consumers are likely to be offered an array of new products. The Committee recommends that the proposed guidance under the guarantee observe the following principles. It should:
- Be demonstrably impartial as to providers and type of product;
- Include at least an initial opportunity for face-to-face guidance;
- Be free at the point of use, with the costs of such provision made transparent;
- Make clear to every consumer exactly what is being offered, the limitations of the guidance, and what protection it gives consumers in the event of detriment;
- Be offered from at least 12 months in advance of the consumer’s stated retirement date; and
- Be co-ordinated with Government-sponsored guidance relating to long-term care.
Chairman of the Treasury Committee, Andrew Tyrie MP, said:
“The pensions reforms are likely to lead to financial innovation. That innovation needs to provide products that are in the interests of consumers and which are sold responsibly.
“Following the financial crisis, and the mis-selling scandals, the reputation of the industry is under scrutiny.
“The FCA, with its new powers of intervention, will also be under the spotlight. This will be an important test of its commitment to develop judgement-led regulation. Consumers will lose from heavy handed regulation or the extension of the box-ticking culture that has bedevilled conduct regulation. This achieved little and often protected nobody. Effective regulations are badly needed, encouraging innovation, but the FCA must also act quickly to bear down on consumer detriment where necessary.”
Andrew Tully, Pensions Technical Director, MGM Advantage commented:
"While providers can help provide information to customers, I don't believe they should be part of the guidance service. That needs to be independent and impartial. Let's face facts, all the work over the past few years to increase the numbers of people shopping around, led by providers, hasn't been a success. We have the chance to build a system that really helps customers make the best decisions around their retirement income, but it needs to be independent so there can be no accusations of vested interests taking priority.
"A one-off conversation about their pension pot is unlikely to be what many people need. Ideally people may need someone available over a long period, potentially up to 30 years – from before they start taking benefits until well into later life. This is especially the case after next April as more flexibility means many more options, so even more need for help.
"Much guidance and advice will be around the tax implications of when and how to take benefits. While you can take a lump sum, for most people it's not as straightforward as just taking all the pot out at once as that may result in a high tax bill. Many may be better phasing benefits as that will be much more tax efficient. And many will want to achieve some form of sustainable income for life.
"While guidance is helpful, many others may need full regulated advice. So there needs to be a clear hand-off from the guidance service to financial advisers."
