26 January 2015
- At last the regulator has bowed to pressure for second line of defence – essential in the new era of freedom and choice
- Providers must ask questions and give risk warnings before customers make irreversible pension decisions
Fantastic news for customers: I am so delighted that the FCA will finally force firms to take more care of their customers, asking vital questions and warning them about the risks of irreversible pension choices. At last, pension providers will have to do more to give their customers a fair chance of making the right decision, rather than relying on customers themselves to understand all the complexities of pension choices. Of course, this should have happened long ago, but I welcome it now nevertheless.
More choice means more risks if people don’t understand pensions: With the new freedoms starting in April 2015, people approaching pension age will have more choices available to them than ever before. This adds to the risk that they may make poor decisions because most people simply don’t understand pensions.
It is now up to the pensions industry to rise to this new challenge: Being careful about looking after customers should never have been an optional extra in the pensions landscape – but it has taken a long time to finally force regulatory action. Is it absolutely vital to a successful future for providers and customers.
Mis-selling uncovered by FCA demands urgent action: The FCA’s recent Retirement Income Market and Annuities reviews uncovered clear evidence of mis-selling of retirement income products. Those findings clearly indicated the need for customer protection. This is a huge market, with more than a thousand people reaching pension age every single day. It is, therefore, good to see the decision to introduce more protection is being rushed through to start in April, even before consultation in order to prevent this from happening to more and more people.
Pension decisions can be irreversible: Once a customer has made an irreversible pension decision, they cannot undo the damage later and the risk of consumer detriment is particularly high at retirement. This could be buying the wrong type of annuity, such as failing to cover a spouse, or failing to obtain a rate that reflects their poor health. Alternatively, customers may cash in their whole pension in April, without realising the tax implications.
Mis-buying vs. mis-selling: Too many customers with serious illnesses have been buying annuities that assumed they were in excellent health. Firms sold them such products without concerns because providers were not required to ask whether their customers were indeed well and just claimed it was the customer’s fault for ‘mis-buying’. It is more than six years since the Regulator’s initial findings of such failures, but the FCA just relied on ‘disclosure’ with insurance or pension companies having an obligation to ‘clearly inform’ their customers about their options in multi-page ‘wake-up packs’ that many did not understand and included terms they had never encountered before. ‘Disclosure’ has not worked – as confirmed by FCA investigations. What is ‘clear information’ to a pension provider or a regulator is simply not understood by most customers.
Plain English: From April, providers will have to ask some basic questions and alert customers to the risks of any action they wish to take, including the tax implications. The Regulator rightly insists these questions and risk warnings will need to be phrased in plain English, no complex jargon about ‘impaired life’, single life’, ‘joint life’ or ‘enhanced’ products, but clear questions and statements.
Pension Wise guidance isn’t enough: Even though the Government will introduce the ‘Pension Wise’ guidance service in April, it is simply not safe to assume this will be sufficient. Some may not take the Guidance, others may not understand it and a second line of defence to protect people is essential.
Restoring trust: By asking appropriate questions and giving customers proper risk warnings, they should have a fairer chance of doing what is right for their own circumstances. With auto-enrolment proceeding apace, it is so important to ensure trust in pensions can be restored. It is right that people are going to have the choice to make their pension savings work well for them, but the risks of poor decisions must not be ignored. Introducing better protections is a sensible step forward for the future.