This week has seen the announcement of another consultation, this time intofinancial advice. The terms of reference have been published at this stage, with the details of the consultation to follow in the Autumn.
One of the stated objectives of the consultation is “how to give firms the regulatory clarity and create the right environment for them to innovate and grow”. The raft of changes that have hit the pensions and savings industry, particularly since the 2014 Budget, have created a challenging environment for sustaining existing businesses let alone driving growth and innovation. The threat of retrospective changes to regulation/regulatory practice is, in my view, the greatest barrier to the commitment of the resources necessary for innovation and growth.
There is another consultation currently in progress into the early exit charges levied on (some) pension products. This exit charges consultation raises the very real spectre of retrospective changes repeatedly but also acknowledges their potential impact, stating:
- “The government is clear that if there is evidence of excessive early exit charges … it will consider the option of imposing a cap on such charges” (paragraph 1.11);
- “The government is clear that any option which could cut across existing contractual property rights, such as a statutory cap on exit fees, would represent a significant step. Any such measure should only be taken as a proportionate means of achieving a legitimate objective in accordance with the public interest” (paragraph 2.7); and
- “The government is also mindful of …. the potential legal impact on existing contracts of applying such a limit retrospectively” (paragraph 2.26).
The exit charges consultation does not help engender confidence any further given that it does not define what an ‘excessive early exit charge’ is. For that matter, there are no clear definitions of ‘proportionate means’, ‘legitimate objective’ or ‘public interest’ in the consultation either.
I am certainly no apologist for the conduct of some industry participants, the contractual terms they have written business under nor the charges levied. However, clients have voluntarily signed up to the contracts they are subject to. There was no legal compulsion, as far as I am aware, to enter into any of these contracts. Each product market has had competing firms, offering different terms. Many contracts had the option of cooling-off periods post purchase too. Times change, market conduct changes and the features of available products change – not only in pensions and savings but in other areas too. How about buyers taking responsibility for their actions (having done the necessary prior background research)? Unfortunately, in many cases the Government seems to be creating an environment where buyers need not any due diligence into what they’re buying as they feel they can rely on Government changing the rules after the event if there is enough of a consumer outcry at the product in question.
The focus on governance and transparency of fees/costs proposed in last year’s“Better workplace pensions: Further measures for savers” Command Paper is, to my mind, a more effective way of looking after savers’ interests. Explicitly defining the types of charges that all links in the provision chain can levy andmandating the disclosure of these charges, in a simple format, should help with informed decision-making. Unfortunately, early evidence of effective implementation of this approach has been poor with providers being allowed to bundle life cover, and the associated charges, with pensions savings in Automatic Enrolment (“AE”) arrangements. This bundling has opened the door for cross-subsidisation of pension provision by the insurance element, potentially circumventing the 0.75% p.a. charges cap. I understand that other ways of beating the charges cap have been (inadvertently?) created by regulation over the last year too.
A robust commercial environment with respect for contractual arrangements willingly entered into by consenting parties is key to attracting providers, and related investment, to deliver innovative services to their clients. The Government has boosted the potential client base by introducing AE. This larger target market would be expected to be attracting investment by providers but uncertainty around regulations is one factor limiting this commitment. There are certainly opportunities to improve the UK pensions environment by changing legislation/regulation, potentially after consultation, moving towards consistency in the legislative/regulatory and taxation spaces. A clear direction of travel towards these ends would be welcome.
The potentially positive contribution of consultations should, ideally, be supported by their positioning. Currently, a number of these consultations feel to me like a precursor to the goal posts being moved, undermining provision of support (in the form of relevant products and services) to those who want to do the right thing. Does Her Majesty’s Treasury need to consult the Behavioural Insights Team to position its consultations and public musings more constructively or are the posts foreshadowing motion?