David Geale and Teresa Fritz gave evidence.

Our first witnesses are from the Financial Conduct Authority and the Financial Services Consumer Panel. We have until 9.30 am for this panel. Could you please introduce yourselves for the record?

Teresa Fritz: I am Teresa Fritz, a member of the Financial Services Consumer Panel.

David Geale: I am David Geale, director of policy at the Financial Conduct Authority.

Welcome.

Q 1

Thank you for coming along to give evidence this morning. We have a fairly short period of time and I know that colleagues wish to pursue some lines of questioning, so I will try to keep my questions brief. First, will you set out your views on what the main focus of regulation should be from April 2015? Do you have any work ongoing, in preparation for the passing of the Bill?

David Geale: As is well known, we have responsibility for setting standards for the guidance guarantee; then, we will have responsibility for monitoring the progress of the guidance guarantee and the delivery through the delivery partners. That is one of our core focuses going forward. Obviously, the market is also changing quite significantly with the Budget changes, so there will also be a significant role for us in monitoring those changes—looking at the different products that develop and the different behaviours that occur, both in firms and among consumers—and taking action as and where necessary.

Teresa Fritz: The Consumer Panel advises, supports and challenges the regulator where we feel it is necessary. Our concerns from April are in the product development area: products are already very complex, but we envisage that there will be more complex products. We have discussions with the FCA and we know that it is on the ball with that and is going to be looking out for it. The other key thing to be watchful of from April is the sale of complex products without regulated advice. Currently, annuities can be sold through either a regulated advice stream or what is known as non-advice, which is effectively execution only. We have huge concerns that even more complex products than annuities will be sold without regulated advice.

Q 2

We will pursue the question of annuities and the advice and guidance, but first I have a couple of specific points to put to David regarding the FCA. First of all, will the results of the retirement income market study be published in time to inform debate on the Bill? Also, on product innovation, I understand that the FCA has said that it is worried about some of the smaller, more esoteric investments—I think that is how they were described—rather than about larger firms. Could you say a bit more about that?

David Geale: Certainly. We have said that the market study will be published before the end of the year, and it is still our intention for it to be published before Christmas. Obviously, due to the confidential nature of a market  study, I cannot say much about the findings or remedies at the moment, but what is fairly obvious is that in a study of that type we will be looking at things such as the information for consumers to help them shop around, and the monitoring of the market in future.

On product innovation, I said to a previous Committee that we are in regular contact with the major providers, and what they seem to be doing is looking to fill their range, rather than developing anything particularly new, innovative or different at the present moment in time. Obviously I expect that will come—1 April is not a big bang date, to some degree, and the market will develop over a period of time. We are of course talking to smaller providers as well. We have a range of sources of information that we use to monitor the market, including consumer intelligence and firm intelligence, information from the panels and from people who approach the panels, information from firms, our own data monitoring and so on. We are keeping a close view of the market as a whole.

Q 3

The guidance is extremely important, and it is being dealt with through another piece of legislation. Both of your organisations produced reports last year highlighting the challenges that consumers face when trying to shop around for an annuity, for example. Do you believe—given your comments, you may have some views on the matter—that guidance will be enough to help people to navigate the wider range of options that the Bill will bring in? Are there particular areas where you want to see the proposals for guidance strengthened as they are being developed? Is there anything you want added to the process?

Teresa Fritz: Basically, the guidance will work only if the people giving the guidance are qualified and have enough expertise to do it. I speak as an ex-guide: I set up and ran the Which? money helpline, which was a guidance service, for two years, so I have given pension guidance to many consumers. It is a difficult and complex thing to do. You need to be as expert and as qualified as a regulated adviser; if you are not, you cannot answer all the questions that consumers have. It is a very complex area of the market, and you need to be au fait with all the options.

The taxation element alone is very complex, so guides will need to be experienced and remunerated correctly. This is not a call centre job; it is an expensive service to deliver, so I think it is going to be crucial that the funds available are used in the best possible way. One of the most cost-effective ways of doing this is by telephone; face to face is a very expensive way to do it. We do have some concerns that the face-to-face delivery service will take a lot of the funds, perhaps leaving not as much for the telephone service. We have a lot of concerns.

At the end of the day it comes down to two people, and that is the consumer receiving the guidance and the guide giving the guidance. If that is high-quality enough, then I think—to answer your question—it will go a very long way to help consumers stop making bad mistakes. If the guidance is not of high enough quality, then it will not.

David Geale: I will address that in three parts. First, what is the guidance and what is it doing? Secondly, what are we looking for? Thirdly, I might just touch on some of the responses to our consultation.

I think the guidance is an additional service. At the moment, as Teresa said, people either self-execute or they take advice. The guidance is something that sits in the middle. I would expect it to explain to people the implications of the various choices available to them such that, for some people, it will be enough for them to go forth and make a decision, and for others, it will be enough to make them realise that they need something more—they need to take advice; and I would expect the guidance to signpost people to advice where that is needed. So to some degree, it is something more than they have now. I agree with Teresa on the importance of a good delivery service. What we will be looking for is for the guidance to be delivered consistently and in line with the standards that we set out. We will be monitoring it for that very reason.

In terms of the consultation responses and what people have said to us about the guidance, some were looking for a little bit more detail, so we have set out some fairly high-level standards, and we are looking at how we might flesh it out a bit, in terms of what the delivery partners actually deliver; but others felt it was at the right level, and the guidance would be something useful. I think the hand-off to advice is going to be a very critical part of this.

Q 4

Are the indemnity arrangements of financial advisers sufficient to take into account the fact that problems with retirement income products may not arise for many years?

David Geale: In an event where redress is payable for some form of mis-selling, a combination of the capital that we require advisers to hold, the professional indemnity insurance that we require them to hold, and the Financial Services Compensation Scheme if the firm is no longer around, is there to pay that redress. It is also important to look at some of the work we have done, for example through the retail distribution review, where we sought to remove some of the incentives for advisers to sell the wrong type of product; we have also raised the qualification bar. What we should see in future is better qualified advisers, incentivised in the right way to help their customer, so over time I would expect to see the incidence of mis-selling reducing.

Teresa Fritz: For regulated financial advisers, nothing much has changed. They have been doing this for years; they should know how to do it properly. The big area of concern, going back to what I said earlier, is perhaps the growth of what we know now as non-advised streams, which was worrying enough when it was just annuities, but is more worrying with complex products like income drawdown. For regulated financial advisers, it should be business as usual; they will just have more customers, probably.

Q 5

Okay. Can you foresee any need in the future to compensate people who are sold unsuitable products who have not taken financial advice?

David Geale: That depends, is the answer, unfortunately. At the risk of oversimplifying the answer to the question, if people have mis-bought something due to the information they were given being misleading or wrong, yes, I would see a need for compensation and redress at a high level, subject to the merits of each individual case. For people who have made the wrong decision after being treated  in the right way and given the right information—for example, they chose not to take advice and still made the wrong decision—it is much harder to make a case for redress, because that was their choice and they were given the right information.

Teresa Fritz: At the risk of sounding like a broken record, a lot of consumers do not understand that they have gone down the route where they are not getting protected regulated advice. Sometimes execution-only “helpful” services can look very much like advice, but that is the big difference. If you do not take regulated advice, you do not have redress to the Financial Ombudsman Service. Unless the literature has been misleading, for example, you do not have redress. A lot of people have already gone down that route and bought annuities through a non-advised route who might well have been better advised to go to a regulated advisor and buy a different type of annuity, but at the moment, they do not have any redress.

Q 6

It is all very well and good for people like you, who understand this business inside out, but most people have a fairly low understanding of this and do not necessarily see the distinction between advice and regulated advice. It may be obvious to us, but it may not be obvious to the man or woman in the street taking out a product at a particular point. Is there anything that could be done, in either our purview or your purview, to make that stronger? In a sense, this is going back to what Teresa was saying earlier about the crucial importance of the quality of guidance given.

David Geale: I would say three things. Our expectations now are that where advice is not being provided, it is clear to people that advice is not being provided and that they are effectively on their own in that decision making. Equally, the information that people are provided with has to be clear, so there is an expectation on providers there as well.

Secondly, there is the guidance guarantee. I expect it to be very clear through the guidance guarantee that people are not seeking advice. What is the implication of not receiving advice and what are their responsibilities coming out of that process? One of the answers may be that they should take advice.

Thirdly, looking at it a little differently, there is the question of what is actually useful for people? To some degree, some people do not need advice—they can make their own decisions; they just need information—other people need a bit of advice about a specific need, and other people need a full financial review. We are carrying out a consultation on the boundaries between those different types of advice and what firms can do. I think that has the double-edged benefit of, first, making it clearer to firms what they can and cannot do, and secondly enabling different types of services to be provided.

Teresa Fritz: The FCA’s recent consultation on what is advice and what is non-advice has been very useful. It has been a good way to get the industry to now say, “That issue has gone; there is no grey area and it is quite clear.” The FCA is now helping regulated firms to be innovative and to have different models. That is all great, but when when the panel did its annuities research last year, it found that most of the confusion for consumers occurs in the sales of regulated products online. We said that, at the very least, what we would like to see is a code of conduct if firms decide to go that route, and that  what a consumer is giving up should be very clearly signposted on the homepage—in other words, if you go this route, you lose protection. That is the key. Most consumers do not realise that they are losing something by going that route. They think this may be cheaper or easier. They are used to buying car insurance online, so why not an annuity? Our fear was that the warnings were not strong enough. We would like to see a code of conduct for firms that decide not to go the regulated advice route, but to sell regulated products online.

Q 7

The ABI has said that we need a second line of defence in addition to the guidance guarantee and that customers should be asked about their personal circumstances to ensure that what they are sold is the right product for them. Do you agree with the ABI?

Teresa Fritz: This is a difficult one. Yes, in essence. I think there needs to be some form of catch-all, because there will be people who completely miss the guidance service for various reasons. They might feel initially that it is just more red tape and that they just want their money. I do not think you can compel people to go through guidance or take advice, because at the end of the day it is their money, but a lot of consumers just do not understand what they are giving up by going straight to the provider. There needs to be a second line of defence or whatever, but it cannot be too prescriptive.

I am sure the FCA will work with providers on communications to their customers. Providers have every right to talk to their customers and to deal with them as they always have, but we feel that they could guide them back to the guidance in the first instance, or at least ask them whether they have been through guidance and point out to them what guidance will do. Some consumers might not realise that guidance is free; some might not realise that it will actually be going through their options for them. We think that if the providers explained that to them, quite a lot of consumers will take notice and go back through the guidance.

At the end of the day, if consumers have taken an informed decision and want to access their money, it is the job of the providers to provide that to them, but there should be customer care, as there always is—you should be looking out for your customers’ interests, as any good company would. The key for us is that there is consistency in the messaging from all providers. I do not think we have too much to worry about with the very large providers, which are very aware of the problems that could arise, but some of the smaller providers might be more constrained—they might be more encouraged to have roll-over business, just as they used to with annuities, and be less stringent in encouraging their customers to shop around. There is a lot to be done there, but we think the FCA is talking to the ABI and ABI members about how best this can be done.

David Geale: We are indeed talking to providers and ABI members. The key thing here is that there is a difference in the services being provided. The first step has to be to make people aware of the guidance guarantee and of the fact that they could take advice or use the guidance guarantee when going into this process. Regarding the back-stop, it is a question of what service is being provided at that point. If a provider starts asking about your personal and family circumstances and suggesting that you should do something different from what you  have requested them to do, that sounds like advice and it is likely to be advice. If the provider is willing to take on giving advice and has the appropriate permissions and the appropriate systems and controls to apply suitability, it may be fine, but that is not where they want to be for the most part, as I understand it.

What I can see being helpful and sensible—we are talking to some providers about this, and we are thinking about whether it needs to be in rules or whether it is something they can do voluntarily—is to have something along the lines that Teresa has suggested. When a customer asks a provider either to access some of their pension or to do something, the provider could ask, “Have you taken the guidance guarantee? Are you aware of the guidance guarantee? Have you taken advice? Are you aware that you could take advice?” If the answer to those questions is no and the customer still wishes to go ahead, that is the customer’s decision. The important thing is that they are given information that explains the implications of that decision, rather than advice to do something different.

Q 8

Given your response to my colleague’s question about whether compensation should be available to those people, could we not build that into the system? So not only what you said—somebody goes directly to the provider, who says, “Do you realise that this advice is free? Do you realise that you will lose protection if you don’t go down this route?”—but should people who are not asked those questions be suitable candidates for compensation?

David Geale: There is a question of what is the detriment that occurs in terms of redress being payable, although asking those questions is not currently in the rules or regulatory requirements. It might be sensible step, but it is not currently in the rules. Obviously the service is not there yet for people to do that. If we made a rule that says that firms must take those steps and a firm does not take those steps and customers can be shown to be losing out as a result, as with any other rule breach redress may be payable if customers end up in a worse place. Obviously many customers would not end up in a worse place; many would get what they wanted, regardless of the back-stop.

Q 9

We have been here before, have we not? I can envisage a court case 10 years down the line where that sort of compensation is granted. Would it not be better to build it in at the beginning?

David Geale: The question is: what are the safeguards around this? The guidance guarantee will be signposted to any customer who is asking about access to some of their pension fund, so they will be signposted by the ceding provider, if you like. Is there a case for putting in a requirement on the receiving provider to point them towards guidance as well? I think that is very easy to do. As I said, that is one of the items that came out of the response to our consultation. We are considering whether we should make rules in that area.

On whether redress is payable, if it is the customer’s right to take the money out of that account and they choose not to take advantage of the guidance service and not to take advantage of advice, that is their choice. If they were taking the money out of a bank account—I appreciate that there is a difference here—or any other  form of investment, we would not usually start second-guessing their decision. It is a question of what is available to them. Have they been given the opportunity to access what is available to them? If they have then chosen to do something different, that is their choice.

Q 10

I can just see the court case now. Is there a level of pension savings below which flexi-access drawdown products are unsuitable because of the increased charges and the investment risks? Will that change over time?

David Geale: It will change over time certainly, because we do not really see those products available in the market at the moment. We previously said that for customers with under £50,000 in their pot it was unlikely to be suitable to access drawdown under the current product range.

Q 11

So the answer is yes?

David Geale: Yes, under the present range of products. But there is no reason why over time flexible access products need to be poor value for money or to represent a high element of risk: it is about people understanding what they are getting into. We will have to see how the market develops to answer that question fully. As I say, under the current regime there is a limit to how much people should have before they go into those products. Over time we will see how the market develops. Equally with the new freedoms, like the ability to access the uncrystallised lump sum and because of those different things that are available and the different ways people can access their money, you would expect to see competition take effect in that market as well. So we might hope to see charges come down over time.

Teresa Fritz: I have been in the industry quite a long time. I was a financial adviser about 20 years ago and there were products that looked like income drawdown around, although not very many. Then, the limit was £200,000; that dropped down to £100,000 a few years back, and now it is down to £50,000. It is a very tricky answer. The problem is not so much even the charges—I will come to the charges in just a second—but the level of risk that consumers are undertaking with income drawdown. You have to start understanding longevity risk as well as investment risk and inflation—all the risks. For most consumers with less than several million, when they are used to taking financial advice, that is a very difficult thing to understand. So whether it is a £100,000 in your pot or £50,000, it starts to become a question of how long is a piece of string? It is a very difficult concept—much more difficult to understand than buying an annuity, which gives you a guaranteed income for life, and we saw how many people got that wrong. So it is one of those things that we have to keep monitoring. The charges are—

Order. I am sorry Ms Fritz. Do you mind if we call it an end there? We have three more Members who wish to ask questions.

Q 12

What plans should be in place for people who simply will not engage with the choices they now have to make? If someone reaches their chosen retirement date and just does not reply and does not decide what to do with their pot, how should providers handle that situation?

David Geale: The first way to handle that situation is to try every possible means to get them to engage. It is their money, after all. There will be people who still choose to engage with the guidance guarantee and who still fail to engage with their provider. The only thing that providers can do is to keep trying to stay in touch with those customers. They may have decided not to engage at that point quite reasonably. They may be deferring their decision to a later date and want to carry on working, for example. I do not think in the first instance that it comes down to continued communication. If people choose not to engage, the provider can only do so much to make them engage.

Teresa Fritz: That is very much as it is now. There are people who do not engage. Ultimately, if you know you have a pension scheme, at some point you will have to go to your provider to get that money. They are the gatekeeper. It is all about communication. The current wake-up pack that you get needs a radical overhaul, which I think everybody realises, and there needs to be much more communication as well. There needs to be ongoing communication for consumers, and not only from the provider. This is where the guidance service will come in. Once people get used to the fact that there is a guidance service out there, somewhere to go, they should be there ready and able to talk to consumers who may have only small questions about their pension pot.

Q 13

This will not be an issue only when you hit 66, or whatever the retirement age is. Perhaps when you are 10 years from retirement, you will need to be thinking about whether you want to be de-risking your pot to have it there when you are 66 and you can buy an annuity, or you want to take riskier investments to keep growing the pot. How will you ensure that providers make sensible decisions or take a fair approach to people who perhaps at 55 are not thinking or saying what they want to happen in that situation? Presumably we need a default scheme—a standard default—for people who say nothing at that point.

David Geale: A number of things need to be done. The market is changing significantly. We can and we are talking to providers, and we should talk to providers about the changes in the schemes they are providing. There are changes to lifestyles, and a lot of the providers are thinking about what that means for how they would previously have lifestyled pension funds. One answer is to have some form of default, but question then is whether that is fair to everybody who is going into the default, so you create a potentially different set of issues. To some degree I question whether there is such a high risk of people not engaging in the new environment, given that they can have further options, including just taking the money out, or whether it is a different risk that we will find, but I do agree with you: because of the changes to the access that you have, it will change the de-risking of the portfolio and bring new challenges, and we will need to monitor how providers respond over the coming months and years.

Mr Mills, we are going to move on so that everybody has an opportunity to ask a question. We will have a minute each from Mr Evans and Mr Andrew Stephenson. If we can have quick questions and quick answers, that will be great.

Q 14

Just a quick one. Will the industry be ready by 6 April? This is all very rushed and it will be very complicated. We have talked about annuities and also about people who were convinced to buy annuities with profits and have seen their pension pot now reduced to nothing. I am deeply concerned. Is the industry ready for the 6 April deadline?

David Geale: We are working with providers to focus on the key things that need to be ready for April. There are some elements of the changes—for example, independent governance committees—whereby you can be on a slightly different time scale, because the first report might be due a year later. So we are working with providers to focus on the key things that they need to be ready for.

Teresa Fritz: We are very worried about the face-to-face guidance delivery. It is a huge challenge for CAB to get ready for April. We have to use the template that we have —the Pensions Advisory Service, which knows what it is doing and what it is building on. We need to start from there and go upwards, and make sure that the quality of the guidance is not dragged down by the timetable.

Q 15

My background is in general insurance, not life or pensions. In that sector, when voluntary regulation was replaced by statutory regulation under the FSA, there was a shift in non-advised sales. Many small high street brokers went out of business, because providing advised sales became very risky, whereas providing non-advised sales on websites became much easier and less risky, and they therefore flourished. This sector has been regulated for much longer, but do you fear there will be a shift towards non-advised sales, and what can we do to stop that?

David Geale: There is a potential that some people will go through the guidance guarantee and decide that that is enough for them and that they do not need to go and pay for advice. That is fine, if that is okay for them. A large proportion of people do not take advice in the annuities market now. Drawdown is different: I can see the greater complexity, and there could be a greater need for advice. Again, the problem might be a slightly different issue.

Teresa Fritz: Signposting will be crucial. We have already seen a big shift in the annuities market. That has stalled because of the pension reforms. We have to guard against that, because the products coming along are even more complex than annuities. My belief is that they cannot be sold under a non-advice regime. We have to be very vigilant. Signposting to regulated advice will be absolutely crucial.

That brings us to the end of the time allotted for the Committee to ask questions of this group of witnesses. On behalf of the Committee, may I thank you very much indeed, Mr Geale and Miss Fritz, for your time today?