Lessons to be learned for the future
42. The introduction of personal pensions was
widely advocated at the time, but insufficient attention was given
to making clear that there was a large category of people for
whom they were unsuitable: those who could join an occupational
pension scheme and who were not expecting to change jobs frequently.
Some people may have been encouraged to opt out of (or not join)
an occupational scheme by the availability of rebate-only pensions,
which (because they required no contributions) would maximise
current take-home pay at the expense of a reduced pension later.
Others appear, however, to have been badly advised, often by sales
staff whose income relied heavily on commission, and without this
being recognised by the regulators at the time. A pension is often
a person's biggest asset and this large-scale series of errors
must not be allowed to happen again. We turn now to measures
to make sure that it does not.
43. There is a role both for competition and for
regulation. The aim should be to strike the right balance. The
draft Financial Services and Markets Bill sets out the powers
of the FSA, and how the areas to be regulated will be determined,
and makes provision for appeals against the FSA's decisions, a
single Ombudsman scheme for discontented investors, and a unified
compensation scheme in the case of insolvency. Much remains, however,
to be laid down in regulations, and many of the issues arising
in this Report will need to be taken into account.
44. There is a need for a serious debate on the merits
of process-based and results-based regulation. We have considered
carefully the case put to us by the Consumers' Association for
a system of results-based regulation (or product regulation) rather
than process-based regulation. The information given to the consumer
needs to be accurate but also comprehensible. Products need to
be suitable for individual investors and be sufficiently flexible
to cope with those whose circumstances change, especially given
the increasing mobility of the workforce. We recommend that
the Treasury publish a paper to assist the public debate on process-based
versus results-based regulation in the course of consideration
of the Financial Services and Markets Bill.
45. When new products are devised, it is essential
that full and balanced information is provided to the public.
The FSA should seek to ensure a measure of commonality in the
details that all providers are required to publish about their
products.
46. Concern has been expressed that too heavy
a dependence on remuneration by way of commission paid on sales
contributed to the unacceptable scale of pensions mis-selling.
We share that concern. The FSA should develop guidance so that
excessive dependence on commission-based selling is reduced. In
addition, there should be a mechanism for checking compliance
with the rules before commission is paid. The Prudential have
begun to introduce a scheme under which sales count for commission
only if the policy is still in force a certain time later.[77]
We recommend that the FSA should monitor the "persistency"
rates of personal pensions (i.e. the proportion that are still
being contributed to at various times after being taken out) and
that this information should be published.
47. It is essential that the FSA has the ability
to enforce its regulation of the financial services sector effectively.
Powers will be required to ensure that future mis-selling can
be detected, compensation paid speedily, and fines imposed, and
that the burden of payment and fines falls on those directly responsible.
In addition, the proposals for approval of particular staff must
be used to ensure that managers at every level are made personally
responsible for ensuring that the rules are complied with. In
serious cases of non-compliance, the power to withdraw authorisation
will have to be exercised.
48. These powers that we foresee that the FSA
will need to possess are wide-ranging and serious. The public
and the financial services sector will want to be reassured that
they will be exercised fairly and subject to public accountability.
We look forward to receiving the Treasury's proposals for open
and accessible procedures for complaints handling and oversight
in the case of the FSA itself.
49. Insurance companies hold large amounts of
other people's money. We were concerned to learn that the regulation
of this aspect of their business is ill-designed, little known
and rarely exercised. We believe that there is scope for improvement
in the protection given to policyholders. We recommend that the
Treasury examine whether legislation or further rules are necessary
to define what is meant by policyholders' "reasonable expectations",
the extent to which surplus "orphan" assets should be
distributed, and to whom, and whether the role of the appointed
actuary of an insurance company (see paragraph 29) in safeguarding
policyholders should be strengthened. We also believe that the
Treasury should examine whether legislation is necessary to tighten
rules about fraudulent selling and about competition.
Summary of conclusions and recommendations
50. Our principal conclusions and recommendations
are as follows:
(a) We welcome the fact
that increased publicity resulted in the first stage of the pensions
review being speeded up, and we trust that Phase 2 will also be
completed as quickly as possible. As part of this process we urge
the Financial Services Authority to conclude its consultation
on the remaining "rebate-only" pensions with all speed.
Where mis-selling is established, we believe that compensation
should be settled in the same way as in other cases within Phase
2 (paragraph 17).
(b) We are concerned that
the findings on Free-Standing Additional Voluntary Contributions
pensions (FSAVCs) indicate that, as with other personal pensions,
the regulators were unable to detect mis-selling at the time (paragraph
19).
(c) Any government pronouncement
on standards for the terms and conditions of investments needs
to be accompanied by a clear statement that it is not a guarantee
either of suitability or of investment performance. We shall be
monitoring public perceptions of CAT-marking for Individual Savings
Accounts and the implications for any corresponding standards
for pensions (paragraph 23).
(d) The essential difficulty
with providing information for the consumer is that the costs
which can be disclosed (charges and commission) may well have
a smaller effect on the outcome than growth of investments and
level of bonuses. These depend both on market conditions and the
skills of the insurance company, and cannot be accurately forecast.
Nevertheless, cost information must be provided on a consistent
basis and it must be clear (paragraph 24).
(e) We welcome the decision
to allow policyholders to complain to the proposed Financial Services
Ombudsman about the size of bonuses, and thereby indirectly about
the attribution of free or orphan assets. Nevertheless, we recommend
that the Government should establish a much clearer and more open
policy on the attribution of these assets between shareholders
and policyholders and the extent to which they should be distributed
(paragraph 31).
(f) The shareholders,
who benefit from the profitability of the company, have a responsibility
and should bear a substantial share of the loss; on this matter
we concur with the judgement of the Consumers' Association that
placing responsibility on shareholders will encourage better management
in future (paragraph 32).
(g) We recommend that
the FSA and the Association of British Insurers clarify the status
of the Accord with professional indemnity insurers and the PASS
schemes in relation to Phase 2 of the pensions review (paragraph
39).
(h) We accept that pension
investors cannot look for compensation where their losses result
from the market and not from mis-selling. We also recognise the
dilemma of ensuring that those who were poorly advised are compensated
without putting such a burden on independent financial advisers
(IFAs), many of them very small, that those who acted properly
are driven out of business. We expect the Personal Investment
Authority (PIA) to be scrupulous in judging IFAs only by the rules
which were in place at the time, and we expect IFAs with complaints
against the PIA to receive adequate access to the PIA's complaints
procedure. It goes without saying that no IFA exercising a right
to complain in a proper manner should have anything to fear simply
as a result of doing so. Effective access to a complaints procedure
by regulated bodies and people is also something we will wish
to see in the new FSA structure (paragraph 41).
(i) The introduction of
personal pensions was widely advocated at the time, but insufficient
attention was given to making clear that there was a large category
of people for whom they were unsuitable: those who could join
an occupational pension scheme and who were not expecting to change
jobs frequently. Some people may have been encouraged to opt out
of (or not join) an occupational scheme by the availability of
rebate-only pensions, which (because they required no contributions)
would maximise current take-home pay at the expense of a reduced
pension later. Others appear, however, to have been badly advised,
often by sales staff whose income relied heavily on commission,
and without this being recognised by the regulators at the time.
A pension is often a person's biggest asset and this large-scale
series of errors must not be allowed to happen again. (Paragraph
42).
(j) We recommend that
the Treasury publish a paper to assist the public debate on process-based
versus results-based regulation in the course of consideration
of the Financial Services and Markets Bill (paragraph 44).
(k) When new products
are devised, it is essential that full and balanced information
is provided to the public. The FSA should seek to ensure a measure
of commonality in the details that all providers are required
to publish about their products (paragraph 45).
(l) Concern has been expressed
that too heavy a dependence on remuneration by way of commission
paid on sales contributed to the unacceptable scale of pensions
mis-selling. We share that concern. The FSA should develop guidance
so that excessive dependence on commission-based selling is reduced.
In addition, there should be a mechanism for checking compliance
with the rules before commission is paid (paragraph 46).
(m) We recommend that
the FSA should monitor the "persistency" rates of personal
pensions (i.e. the proportion that are still being contributed
to at various times after being taken out) and that this information
should be published (paragraph 46).
(n) It is essential that
the FSA has the ability to enforce its regulation of the financial
services sector effectively. Powers will be required to ensure
that future mis-selling can be detected, compensation paid speedily,
and fines imposed, and that the burden of payment and fines falls
on those directly responsible. In addition, the proposals for
approval of particular staff must be used to ensure that managers
at every level are made personally responsible for ensuring that
the rules are complied with. In serious cases of non-compliance,
the power to withdraw authorisation will have to be exercised
(paragraph 47).
(o) These powers that
we foresee that the FSA will need to possess are wide-ranging
and serious. The public and the financial services sector will
want to be reassured that they will be exercised fairly and subject
to public accountability. We look forward to receiving the Treasury's
proposals for open and accessible procedures for complaints handling
and oversight in the case of the FSA itself (paragraph 48).
(p) Insurance companies
hold large amounts of other people's money. We were concerned
to learn that the regulation of this aspect of their business
is ill-designed, little known and rarely exercised. We believe
that there is scope for improvement in the protection given to
policyholders. We recommend that the Treasury examine whether
legislation or further rules are necessary to define what is meant
by policyholders' "reasonable expectations", the extent
to which surplus "orphan" assets should be distributed,
and to whom, and whether the role of the appointed actuary of
an insurance company (see paragraph 29) in safeguarding policyholders
should be strengthened. We also believe that the Treasury should
examine whether legislation is necessary to tighten rules about
fraudulent selling and about competition (paragraph 49).
1 Evidence, p 1, paras 3-6. Back
2 Evidence,
p 2, para 10. Back
3 HC
(1996-97) 381. See also Treasury and Civil Service Committee,
Fourth Report, Session 1993-94, Retail Financial Services Regulation:
An Interim Report (HC 236), and Sixth Report, Session 1994-95,
The Regulation of Financial Services in the UK (HC 332-I). Back
4 Official
Report, 20 May 1997, col
508-11. Back
5 Evidence,
p 36-7. Back
6 Evidence,
p 33. Back
7 Evidence,
p 1, para 4-6. Back
8 Q
238-41. Back
9 Evidence,
p 53. On guarantees see also Q 29, 120-2. Back
10 Evidence,
p 2, para 9; p 29, para 3. Back
11 Appendix
5, last section. Regulators then stated that records relating
to reviewable business should be preserved indefinitely. Back
12 Appendix
2, para 9. Back
13 Evidence,
p 52; Q 207-8, 219, 227, 230. Back
14 Q
119, 134 (FSA); evidence, p 52 (IFAA). Back
15 See
FSA/PIA: Pension transfers and opt outs review, Phase 2, policy
statement, August 1998, para 6. Back
16 See
for example FSA Press Notice 24/98. Back
17 Evidence,
p 55. Back
18 Q
93; evidence, p 27. Back
19 Q
220. Back
20 Appendix
5 (under heading "Fairness and Proportionality"). Back
21 Evidence,
p 30, para 7. Back
22 Evidence,
p 2, para 15-16. Back
23 Evidence,
p 2-3, paras 17-19, p 4-5. Back
24 Evidence,
p 3, paras 20-25; p 9; p 30, paras 7-10. The league tables are
published as Treasury Press Notices. Back
25 Treasury
press release 168/98, 20 October 1998. Back
26 Pension
transfers and opt outs review, phase 2,
FSA/PIA, March 1998; Policy Statement and Model Guidance, August
1998; FSA Press Notice 39/98. Back
27 Appendix
2, paragraph 15 (figures published March 1998). Back
28 Evidence,
p 8, 35; Q 25. FSA press notice, 16 December 1997 (quoted in
Q 288). In July and August 1998, the PIA fined 87 firms of IFAs
an average of £3,860 (Treasury Press Notice 152/98, 21 September
1998). Back
29 Evidence,
p 53. Back
30 Q
151-2. Back
31 Q
59-60. Back
32 FSA/PIA
press notice 81/98; Association of British Insurers press notice,
19 October 1998. Back
33 Evidence,
p 3, para 29. Back
34 Q
17, 65 (Mrs Liddell), 228 (Life Insurance Association). Back
35 Q
220 (IFAA), 233-7 (LIA). Back
36 Evidence,
p 32, para 25. Back
37 Q
219. Back
38 Q
37. Back
39 Q
181-2. Back
40 Q
1, 46. Back
41 Q
274. Back
42 Evidence,
p 74, para 50. Back
43 Evidence,
p 70, para 6. Back
44 Q
184-5. Back
45 Q
252. Back
46 Evidence,
p 36. Back
47 Q
49. For the figures of 10% and 90%, see Q 53. Back
48 Q
50. Back
49 Q
51. The Government had reached agreements with some companies
about the attribution of their surpluses, often referred to as
"orphan assets" (Q 83). See also Appendices 1 and 4
(HM Treasury) and Official Report, 9 November 1998, col
99-100. The Prudential announced on the day of our evidence
session with them that they were taking the costs of the review
from the long term fund; they did not expect this "to have
an adverse effect on the levels of bonus", but in the unlikely
event that it did would expect to make "an appropriate contribution"
from shareholders' funds (Q 280). Back
50 Q
54-5. Back
51 Evidence,
p 28; Official Report, 1 July 1997, col 94-5. Back
52 Appendix
4, para 11. Back
53 Evidence,
p 71, paras 18-22. Back
54 Q
260. Back
55 Q
220. Back
56 Q
264. Back
57 Q
71, 82. See also Q 162 (FSA). Back
58 Q
390; evidence, p 84. Back
59 Appendix
3. Back
60 Appendix
4. Back
61 Q
22. Back
62 Evidence,
p 1, para 8. Back
63 Press
notice, 3 August 1998. Back
64 Evidence,
p 51. Back
65 Evidence,
p 63. See also Q 233-7. Back
66 Evidence,
p 52. Back
67 Evidence,
p 52. Back
68 Evidence,
p 53, 79; Q 198-202, 248. Back
69 Q
255. Back
70 Evidence,
p 54, 79; Q 192. Back
71 Q
214. Back
72 Q
57. Back
73 Q
143. Back
74 FSA/PIA
Policy Statement: Pension transfers and opt outs review: phase
2, August 1998, paras 6 and 43. Back
75 Treasury
Press Release 103/98. Back
76 Q
220. Back
77 Q
320-2. Back