Pensions News Bulletin June 2016
1. Goodbye perks. Shame, but right.
Since the 2010 Bribery Act it has been an offence, punishable by imprisonment and fines, for companies and individuals to offer or accept extravagant gifts, treats or luxuries which could influence a business decision with another party.
In the financial services industry all reputable companies had a policy to ensure compliance with this even before 2010 but invitations for sporting, entertainment and cultural events have continued even if diminished over the years.
That now seems to be changing dramatically. The FCA recently produced a paper called the ‘Inducements and conflicts of interest thematic review: key findings’ which changes the intent driving the earlier governance policy.
Whereas previously the problem was expressed as unduly influencing business decisions the new paper emphasises that any payment or benefit must be designed to enhance the quality of the service to the consumer, the end investor.
While almost everyone in the industry would agree that although invitations to the general corporate entertainment great days out did not actually influence business transactions they absolutely did nothing for the end investor. However the cost of these events must trickle down somewhere. As a cost of doing business it probably finds its way to the investment or platform charges and is paid for by the end consumer.
Because the application of MiFID2 (Markets in Financial Instruments Directive) is being delayed until 2018 the FCA are making their concerns known now and I hear they have been quite active in telling firms that even those corporate events already planned must not now be used for corporate clients.
What will become of the corporate entertainment industry and the income into sporting events? Will it be worth a corporation sponsoring a sporting event from football to sailing if you can’t utilise your ‘complimentary’ box for clients or provide a skipper and yacht for a day’s racing?
Goodbye perks. But of course they didn’t benefit the end consumer.
2. Could get a better deal but really can’t be bothered.
Pension Freedoms were effective from April 2015 when suddenly people over 55 with a defined contribution pensions pot, or transferring in to one, could use their investment in a myriad of ways all of which have advantages and disadvantages. Such complexity cries out for people to understand how to make their choice. Pensions Wise was therefore introduced to provide guidance on these choices free of charge to everyone. It hasn’t been massively used.
Partly because of the need to make a choice and partly because of the media emphasis on the importance of shopping around it was hoped that people would try to get the best deals for themselves. Indeed, even in the time of the mandatory annuity, pre April 2015, the nation was frequently encouraged to shop around for the best rates. For years everyone retiring also received a letter explaining the shop around open market option when they received their retirement quotation.
A good report from Citizens Advice ‘Drawing a pension: A consumer perspective on the first year of pension freedoms’ found that while freedoms are working well for many there were a number of important problems needing to be addressed. Including that 70% of people who have accessed their pension since April 2015 didn’t shop around.
Other findings were:
- Complex and high fees: Exit fees and other charges are not being levied consistently and are confusing consumers
- Long delays: One in six (16%) had to wait over two months for payment.
- Limited product choice: Not all providers are offering the full range of freedoms to customers.
- Ineffective risk warnings: Fewer than one 1 in 50 (1.6%) consumers say risk warnings had an effect on their choices. In contrast, 20% said their choice was affected by their first conversation with their provider.
- Patchy levels of support: While two thirds of consumers are getting help with their choices, 45% of those with incomes below £20,000 are not getting any support.
For most people getting a better rate on their pension or other investment transactions just doesn’t seem to be worth the bother. Is this apathy related to the behaviour we commonly see elsewhere? Take the lottery for instance. We’ve all seen it – especially in the office or amongst friends. The great enthusiasm driving millions more people to buy lottery tickets when the prize reaches some enormous double rollover record amount. Yet when the prize is only a normal multi million pounds those extra people can’t be bothered!
However pensions and investments are much more complicated and more expensive than a lottery ticket. So in addition to the lack of excitement we have about the perceived small improvement that engagement will make to our pension, we are too busy to put in the time needed to understand what it all means.
3. We should expect better from our regulators.
This month letters were published between the Treasury Select Committee and the FCA about claims that RDR (the retail distribution review) led to the number of people with access to regulated financial advice tumbling from 23m to 7m. The FCA denies this.
It is common knowledge that financial advisor numbers have dropped over the last few years. Also that the main income for most advisors was hit when commission payments to them from insurance companies, pension providers and investment managers was banned.
The problem is that right now the need for financial help has never been greater. Automatic pension enrolment, pension freedoms, the demise of defined benefit schemes, tax changes, new savings vehicles, low deposit rates and rising debt all create an enormously complex money maze that most people are lost in and unable to commit to solutions.
Naturally the Treasury Select Committee are concerned about this and asked the FCA to comment.
Disappointingly the response has been a focus on the accuracy of the numbers rather than the substance of the issue. The FCA say that as RDR didn’t take effect until 31 December 2012 and the numbers relate to the period since 2008 the RDR argument is flawed.
However RDR was launched by the Financial Services Authority in 2006 with the intention of raising financial adviser standards. It was to do this by setting a higher minimum level of adviser qualifications, improving transparency of charges and services and banning providers commission payments. In this the FSA/FCA were successful and they are entitled to shout about it. But to say other factors were as significant as RDR in reducing adviser numbers suggests they have been unnecessarily defensive and mistaken.
Working in the investment and pensions industry it had been clear since the early days of RDR – from 2006/7 – that adviser numbers would be severely reduced. Not least because many, possibly most, experienced independent advisers were of a certain age. Mature, with a very different business model and more professional years behind them than in front. The bancassurers on the other hand relied on tied company advice and low staff and system costs relative to the mass market business they attracted.
RDR was going to turn all this on its head. The rules required retraining, exams, higher ethical standards, higher operational standards, transparency, extensive documentation and high quality IT systems. All expensive to set up with steep ongoing costs. In addition adviser’s incomes would be reduced from a commission on the product sold, paid by the provider, to a fee from Jo Public, the consumer. Jo Public was neither used to paying for advice nor would be prepared to pay anything like the commission level.
This meant that for both the small adviser firm, and the large bancassurance companies, the costs of retraining staff, getting them certified and building the RDR infrastructure was unlikely to be profitable. The industry therefore had to contract and only the most capable fee paid advisers would survive.
The FCA should have explained this, said it was a consequence of professionalising the industry to protect consumers and ensure they received fair and ethical treatment. They could have said they didn’t compromise their requirements because of the undoubted costs of remaking the advisor sector. They should have declared they underestimated or could not have foreseen the increased need for financial help at this time but that they propose doing something about it.
One something should include reviewing their guidelines over regulated financial advice and generic financial advice and making sure companies are clearer than currently so do not continue to be over cautious about providing the best service they can. The mealy mouthed term “guidance” as a substitute for advice should be abolished because Jo Pubic want advice and that advice is generic. “Guidance” doesn’t cut the mustard. It doesn’t give us faith that what we are told is important or valuable.