Select Committee on Treasury Ninth Report



NINTH REPORT

The Treasury Committee has agreed to the following Report:—

THE MIS-SELLING OF PERSONAL PENSIONS

Introduction

1. In 1988, the personal pension provisions of the Social Security Act 1986 came into force. For the first time, they allowed employees to save for retirement themselves instead of joining either an occupational pension scheme provided by an employer or the State Earnings Related Pension Scheme (SERPS) provided by the government. Between 1988 and 1994, more than five million personal pensions were sold.

2. By 1992 it had become clear that many people had bought a personal pension when this was likely to have been to their disadvantage.[1] If this was as a result of poor advice given by the insurance company concerned, or by an independent financial adviser (IFA), this is referred to as "mis-selling". It is important to emphasise that such advice is to be measured against the requirements of the regulations in force at the time, not retrospectively (a point to which we return in paragraph 11). A pensions review to identify the cases involved and to provide compensation was announced in 1993 and is still in progress.[2] Our predecessor committee took evidence from the Personal Investment Authority (PIA), the regulator of most of the insurance companies and IFAs involved, in March 1997.[3]

3. The current government announced in May 1997[4] that it wished to reform the supervision of the financial services industry, by establishing a single regulator—the Financial Services Authority (FSA)—and improving the standard of regulation. The Treasury published a draft Financial Services and Markets Bill at the end of July 1998. We plan to look at the provisions of this draft Bill shortly.

4. In examining the draft Bill, we will be concerned to establish, amongst other things, whether the correct lessons have been drawn from the failures of the past. Before the draft Bill appeared, therefore, we conducted a preliminary inquiry into pensions mis-selling, with a view to establishing what had gone wrong, how the compensation process was proceeding, and what lessons could be learnt. We took evidence from Mrs Helen Liddell, then Economic Secretary of the Treasury, the Financial Services Authority, organisations representing IFAs, the Consumers' Association, and the Prudential Corporation. We received written evidence from these and other bodies. To everyone who helped with our inquiry, we express our thanks.

Personal pensions: categories of cases

5. The pensions review undertaken by the Financial Services Authority—until October 1997 called the Securities and Investments Board (SIB)—and by the Personal Investment Authority identified various categories of cases and assigned priorities to each. The review is limited to people who joined, or were eligible to join, an occupational pension scheme (not those whose alternative was SERPS). Those who did not join are called "non-joiners"; those who left while continuing in the same employment are "opt-outs". In addition, people who opted out or left the relevant employment could transfer the cash value of their accrued benefits to a personal pension (a "transfer").

6. People taking out a personal pension were entitled to use, as a contribution towards the pension, a rebate of some of their National Insurance contributions and incentives paid by the Department of Social Security. If these rebates were the only contribution to the pension, this is a "rebate-only" case.[5]

7. The priority cases identified for Phase 1 of the pensions review were as follows:[6]

CategoryCases to be dealt with in Phase 1 (all ages are at the time of the transaction)
Opt-outs and non-joinersPriority 1: retired or dead investors; opted-out investors aged 35+ still in the same employment (including rebate-only cases).
Priority 2: non-joiners 35+, and opted-out investors under 35, in either case still in the same employment (except rebate-only cases).
Priority 3: opted-out investors aged 35+ not still in same employment (including rebate-only cases).
TransfersPriority 1: retired or dead investors; men aged 55+ and women aged 50+.
Priority 2: men aged 50-54 and women aged 45-49.

8. The main reasons why a personal pension may give a poorer result than an occupational scheme are:

    (a) employers usually contribute to occupational schemes but not to personal pensions; and

    (b) many occupational schemes pay benefits related to final salary and years of service; this may be more advantageous than a personal scheme, which is dependent on the growth of the insurance company's investments.

As a result, in the words of the Treasury memorandum, "in general" personal pensions were most suitable for those who moved between employers frequently (or were self-employed or ineligible for an occupational scheme).[7] The Life Insurance Association (LIA) said that those who did not expect to be with an employer for more than two or three years might very well be better off with a personal pension; other people should have been advised to join their employer's scheme.[8]

9. As alternatives to payment of compensation (into the personal pension, unless the investor has retired and pension payments already made need to be increased), the customer can be reinstated into the occupational pension scheme (if still with the same employer and if the scheme consents) or be offered a guarantee that the life company will make up the personal pension to the amount which would have been paid by the occupational scheme (an option not available to IFAs).[9]

Regulation and calculation of losses

10. When personal pensions were launched, the then regulators (LAUTRO and FIMBRA) issued regulations laying down that any product sold had to be suitable to the investor's circumstances and that any advice given was in the investor's best interests. In addition, proper records had to be kept of transactions and advice.[10]

11. During the course of the pensions review, IFAs complained to us that the rules in force now were being applied retrospectively, and transactions which were approved by the regulators then are being classified as mis-selling now. In addition, a problem has arisen where records were kept only for the usual six years (the limitation period in civil cases), and are therefore unavailable to rebut a charge of mis-selling. The FSA say that IFAs were notified of the requirement to keep records longer than six years in February 1994.[11] A further complication is that the original rules required records to be kept for only three years.[12] IFAs complain that the usual "state of the art" defence (that the practices adopted were the best ones in use at the time) has been rejected.[13]

12. In order to speed the review and save administrative costs, some insurance companies have abandoned checking whether the advice was wrong or whether it was the poor advice which caused the loss, and are compensating whenever a loss has been established. We were told that IFAs are not in a position to do this.[14] This would have contravened their Professional Indemnity (PI) insurance. During Phase 1 of the review, an "accord" was reached with PI insurers about how the review should be conducted.[15]

13. When estimating the level of loss, an assumption has to be made as to how a personal pension will perform in comparison with an occupational pension. These assumptions were laid down by SIB and have been updated by the FSA.[16] The Independent Financial Advisers' Association (IFAA) quoted a transfer case where between 1995 and 1998 the result of applying the revised assumptions changed a benefit to the client of £2,200 to a loss of £38,440.[17] The Treasury said that in general the costs of making compensation had risen rather than fallen, mainly because the outlook for future long term investment returns had fallen.[18] The IFAA also pointed out that annuity rates had unexpectedly fallen; as a result, advice which was perfectly good at the time could turn out to give rise to a loss. They said that they should not be expected to ensure that "no one is allowed to lose any money".[19] The FSA policy is that the loss should be calculated at the time of the review, on the grounds that this is the procedure the courts would follow if a policyholder sued an adviser.[20]

The speed of the review

14. SIB and PIA set targets in 1994 that all of the highest priority cases (those marked "priority 1" in the table in paragraph 7) should be dealt with by the end of 1995 and a substantial majority of the remaining cases by the end of 1996.[21] These targets were missed by almost all firms. The Treasury said that the complexity of the information-gathering process had been underestimated "by all concerned", and that many firms had not given it a sufficiently high priority.[22]

15. In January-March 1997, revised targets were set and simplified guidance issued, with the aim of speeding the reviews. The revised targets varied for different firms, but should result in all Phase 1 cases being dealt with by the end of 1998.[23] In addition, in May 1997, following the change of government, the Economic Secretary met senior executives from the firms concerned, and since then the Treasury has been publishing a monthly league table showing the number and proportion of cases dealt with by major companies.[24] The latest figures show that all firms monitored had resolved more than 75 per cent of the Phase 1 cases by the end of September, except for four networks of IFAs, who had resolved over 60 per cent of these cases.[25]

16. In the spring of 1998, the FSA and PIA consulted on the procedure for reviews of the remaining cases (Phase 2). The proposed procedure, which has since been adopted, is largely similar to Phase 1 except that, instead of covering all pensions in the relevant categories, it will cover only those where investors ask for a review in response to a questionnaire, which is due to be sent out between January and March 1999. Also, further consultation is under way to see if the remaining "rebate-only" cases should be dealt with in the same way as other cases.[26] We note that each of these 418,000 "rebate-only" cases in Phase 2 is estimated to have on average a prospective loss of between £2,250 and £12,000.[27]

17. 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 FSA 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.

Penalties

18. The PIA and IMRO have levied fines totalling several million pounds on insurance companies and IFAs for delays in completing the review of pension mis-selling. In addition, FSA issued a public statement on 16 December 1997 about one insurance company (the Prudential) which, because it was at the time directly regulated by SIB, could not be fined.[28] The IFAA complained that small companies were being victimised.[29] We asked the FSA who would bear the cost of the fines. They replied that it was impossible to say precisely, but policyholders' reasonable expectations had to be maintained. The FSA said, however, that the point of the fines was to speed up the review and focus companies' attention on it, as they did not like the associated publicity. It was not possible to penalise individual staff for actions during the period covering the review, although this remedy would be available in future, as the PIA has introduced a system of approval of individual staff, who (if they break the rules) can be penalised or forbidden to practise. This system is being carried forward into the draft Financial Services and Marketing Bill.[30]

Free-standing additional voluntary contributions (FSAVCs)

19. An employee who belongs to an occupational pension scheme, but who wishes to increase the pension eventually payable, may make "additional voluntary contributions". These may often be made into the occupational pension, but they can instead be made to a separate pension, similar to a personal pension, but in this case called a "free-standing additional voluntary contribution" pension, or FSAVC. Following reports that some of these pensions might have been sold to people who would have been better advised to pay into their occupational scheme, we asked the Treasury about the extent of the problem. The reply was that although the regulators were examining the subject, there was "no evidence of any systematic problem", only "the odd case here and there".[31] However, on 19 October the FSA and PIA announced that visits to a sample of firms showed that in some cases there was insufficient evidence of whether advisers had explained the differences between FSAVCs and AVCs to occupational schemes, and some sales had been made to people whose occupational scheme provided for employers to match AVC contributions or where AVCs could lead to the Inland Revenue limits on contributions being exceeded. The Association of British Insurers propose that insurers should review cases in these two categories and identify any other categories where poor advice might have been given. The review plan is to be finalised in December.[32] We are concerned that these findings on FSAVCs indicate that, as with other personal pensions, the regulators were unable to detect mis-selling at the time.

What went wrong?

20. Our witnesses offered various explanations for why the mis-selling occurred. The Treasury said that the regulatory system failed to prevent, or deal more swiftly with, mis-selling "because firms simply did not abide by the regulatory rules".[33] Several witnesses drew attention to the extent to which personal pensions were advocated at the time of their launch.[34] The availability of rebate-only pensions, where the investor needed to make no contribution at all, may have attracted away from occupational pensions those who wished to maximise their net take home pay at the time, even if they were advised against this course of action.[35] The FSA, as well as blaming regulated firms for breaking the rules, highlighted the problems with co-ordination between different regulators.[36] The IFAA said that there were cases now categorised as "non-compliant" which had been examined by the regulators at the time without any comment being made.[37]

21. Both the Treasury and the FSA mentioned the effect of salesmen's pay depending heavily on commission: Mrs Liddell said "if somebody is for their weekly income put in a position where they have to sell a product it puts a very great degree of pressure upon them".[38] The FSA said that in the PIA's monitoring of firms, they would check if the sales force were operating on a commission-only basis and would "look carefully to make sure that there is no evidence of commission-driven sales".[39] As presumably the whole purpose of the commission is to drive the sales, it might be better to consider outlawing or limiting its payment. We return to this issue in paragraph 46.

Educating the consumer

22. The Treasury said that in future firms would be required to provide "key information on the products they are selling", to enable consumers to make a choice.[40] However, the Consumers' Association (CA) said that the existing disclosure of specific information on charges had not actually resulted in a fall or increased competition, as consumers were "confused by this plethora of information".[41] The regulatory system could not simply rely on the principle of caveat emptor (let the buyer beware), because of the complexity of the products, the imbalance of information between supplier and customer, and the fact that the effect of the consumer's choice may not become apparent for many years.[42] The CA called for regulation of key products by insisting on minimum standards rather than relying on increased public understanding giving rise to increased competition.[43] To insist that customers fill in more and more complicated forms may not be the way to proceed.

23. The proposals by the Government to introduce CAT-marking (Charges, Access and Terms) for the new Individual Savings Accounts have given rise to the question whether some similar mark of government approval might be appropriate for financial products in general. The FSA was "very nervous" of such approval being taken to imply that a product was suitable for everyone regardless of circumstances, but said that it would be possible to say that "commissions above X per cent were quite high". An EU directive limited the restrictions which could be put on life assurance policies.[44] The LIA said that the introduction of marks of approval was a "dangerous road", with such a mark being assumed to be a guarantee of performance.[45] Similarly, the CA, while echoing the dangers of a government "seal of approval", or something which consumers would see as such a seal, advocated clear benchmarks and clear disclosures. 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 ISAs and the implications for any corresponding standards for pensions.

24. 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.

Who benefited? Who pays?

25. The total cost of compensation and administration was estimated by the FSA in March 1998 as follows:[46]

£ million
Phase 14,500
Phase 2Transfers650-1,290 
 Opt-outs640-985 
 Non-joiners2,590-4,260 
 Total Phase 2 3,900-6,600
Total for both phases8,400-11,110

Pensions mis-selling resulted in a large redistribution of income and wealth. The estimated cost of up to £11 billion to those who were mis-sold pensions had, as its corollary, an equal benefit to others. The beneficiaries are many and various, and some identification of them is necessary to arrive at a balanced judgement of whether the source of compensation for mis-selling has been equitable. First, there are those who sold the pensions, often on a commission basis: executives of pensions and insurance companies as well as IFAs. Second, the companies themselves benefited through improved dividends and share prices benefiting shareholders and with-profits policyholders directly, and other policyholders indirectly. (In the case of mutual funds, the shareholder interest was clearly absent.) Third, employers (private and public sector) benefited to the extent that they no longer had to make employer contributions and, indeed, they may not have acted to discourage the opting-out from occupational schemes for this reason. Further, occupational pensioners will have benefited to the extent that other occupational pensioners opted out on disadvantageous terms. Lastly, the government almost certainly benefited from the net effect on tax liability. While it is not in practice desirable to trace liability to each and every ultimate beneficiary of pensions mis-selling, it should be acknowledged that those benefits reached far beyond the IFAs and the companies—or more particularly their policyholders—who are now paying the cost.

26. Mrs Liddell said that the costs of compensation would be allocated differently in different life companies: mutual companies would have to place the costs on policyholders; compensation for non-profit or unit-linked policies would have to be borne by shareholders. Where life offices had with-profit funds and shareholders, the costs would be shared between policyholders and shareholders in the same proportion as any profits would have been shared (for many companies, 90 per cent for policyholders and 10 per cent for shareholders). She added that this would not necessarily result in decreased policy bonuses, as insurance funds often accumulated surpluses to even out fluctuations in returns.[47] Mr Roger Allen of the Treasury added "we cannot protect with-profits policyholders from paying their share of the costs but we would expect companies not to favour shareholders over policyholders.[48] He added that the surpluses in some companies' with-profit funds are so large that they are "genuinely surplus to requirements" and that it was therefore "reasonable" to take the compensation from them.[49] This was an area where the Treasury was having discussions with some companies and would be keeping a "very close watch" on what the companies did.[50] The Treasury also drew to our attention a written answer of July 1997 (when the Department of Trade and Industry was responsible for insurance regulation), which laid down principles to be followed and drew attention to the government's powers to intervene to protect the "reasonable expectations of policyholders" under the Insurance Companies Act 1982.[51] At our request the Treasury later sent a paper describing the sources of compensation reported by September 1997 for Phase 1. Mutual companies (16 companies) had no option other than meeting the costs from policyholder funds. For proprietary companies, the division was as follows:[52]

Source of fundsNumber of companiesPercentage of companies
Long term fund (non-profit)3751
Long term fund (with-profit)2027
Long term fund (mixture of non-profit and with-profit)68
Shareholder funds46
Mixture of shareholder funds and long-term fund34
Indemnities from previous or current owners34

27. The CA objected to the use of policyholders' funds for paying compensation as "expecting one group of consumers to compensate another", and also criticised the lack of legislation on the ownership of policyholders' assets in life funds.[53] As the mis-selling was the company's fault, the company (in the form of the shareholders) should bear the loss.[54] Commenting on a suggestion from the IFAA that many of the shares were in fact held by pension funds of other companies,[55] the CA said that placing responsibility on the shareholders "would encourage better management processes in the future".[56]

28. We discussed with the Treasury witnesses whether they were likely to intervene to protect policyholders. We were told that the phrase "policyholders' reasonable expectations" is not legally defined, and that the regulation had as its first duty the protection of policyholders against insolvency of life offices.[57]

29. Several witnesses mentioned the accumulated surpluses in life funds, often referred to as "free assets" or "orphan assets". The Prudential pointed out that the capital in its life fund did not all come from current policyholders, but had been built up from a number of sources over 150 years.[58] In supplementary written evidence, the Appointed Actuary of the Prudential Assurance Company explained his role in safeguarding policyholders' expectations and the purpose of the "free assets" in protecting the firm's solvency and in the smoothing of bonus rates from year to year. He also referred to recommendations by the Institute and Faculty of Actuaries, which did not require the distribution of "inherited estate", as policyholders would not have expected this.[59]

30. In a further paper, the Treasury told us that they are monitoring how insurance companies are meeting the costs of compensation for pension mis-selling; they also told us that, where they have reached agreement with an insurance company on the attribution of free assets, this has been informed by a report by an independent auditor, and companies are required to write to policyholders explaining the effect of the proposal. Issues on the fairness of bonus policies, currently outside the scope of complaints to the PIA Ombudsman, will be brought within the scope of the proposed new Financial Services Ombudsman when the Financial Services and Markets Bill is enacted.[60]

31. 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.

32. The shareholders, who benefit from the profitability of the company, have a responsibility and should bear a substantial share of the loss from pensions mis-selling; on this matter we concur with the judgement of the Consumers' Association that placing responsibility on shareholders will encourage better management in future.

Independent Financial Advisers

33. Mrs Liddell stressed the importance of financial advice being "of a high standard and also . . . truly independent".[61] Rules established by SIB included the principle of "polarisation", that advisers had either to be "tied" and sell the products of a single firm, or independent, selecting products from all those offered across the market.[62] The Office of Fair Trading has recently announced a review of this principle of polarisation.[63]

34. The IFAA criticised the pensions review as "fast becoming a process to ensure no one loses money, in any circumstances, rather than a review of mis-selling".[64] Issues already mentioned in this Report are accusations of applying rules retrospectively (paragraph 11), expecting records to have been kept for more than six years (paragraph 11), the inability of IFAs to provide compensation by offering guarantees (paragraph 9), and the wildly fluctuating calculations of losses (paragraph 13).

35. The Life Assurance Association also pointed out that in many rebate-only cases, the customer may have made the decision to opt-out of an occupational pension without advice, and sought advice "merely ... about the mechanics of putting into place a 'rebate only' plan".[65]

36. The IFAA pointed out that IFAs were heavily dependent on their professional indemnity (PI) insurers to pay compensation, and that this was causing difficulty with claims. In addition, the excess for each claim could be up to £5,000.[66]

37. The IFAs have also had difficulty performing assessments of losses. Larger companies had had first call on the actuarial skills available and recently "little capacity has been available and that which surfaced was offered at an outrageous cost".[67] The Association of British Insurers (ABI) has announced schemes (PASS (Bureau) Ltd and PASS (Loans) Ltd) to provide support for the review process and also loans, but the IFAA still has doubts about the capacity available and the efficacy of loans in preventing insolvencies.[68] The CA called for insurance companies to provide more help to advisers.[69]

38. The IFAA said that if Phase 2 of the review was conducted as the FSA envisaged, "there will be wholesale business failures in the IFA sector". The cost of regulation—£10,000 a year for the average firm, including training and PI insurance—"pales into insignificance" compared to the cost of undertaking Phase 1 and Phase 2 of the review. The IFAA expected the cost per firm (net of contributions from PI insurers) to be £578,000, more than three times the average firm's turnover.[70] The IFAA said that there had been only one complaint so far, but that individual IFAs were unwilling to complain about the procedures used in the review because of the regulator's power to stop them operating.[71] The Treasury expected the burden of Phase 2 to be met differently by companies of different sizes, but did not advocate an exemption for small firms.[72] Similarly, the FSA said that an IFA which had had a good record in Phase 1 might face a lower degree of regulation overall, but would not be exempt from Phase 2.[73]

39. The "accord" between the PIA and PI insurers mentioned in paragraph 12 is not being continued in Phase 2, although the FSA and PIA consider that the process for identifying investors in Phase 2 is "entirely consistent with the methodology" of the accord and that the policy is "not intended to require any firm to take any step which will invalidate its insurance cover, without its insurer's consent".[74] We understand that the ABI's PASS schemes mentioned in paragraph 37 may be extended to cover Phase 2. We recommend that the FSA and ABI clarify the status of the Accord and the PASS schemes in relation to Phase 2.

40. On 17 June Mrs Liddell put out a press release criticising the attitude of some IFAs to Phase 2 of the review as "passing the buck" and "tarnishing those IFAs with integrity".[75] When we put this to the IFAA, they described the Minister's remarks as "unfortunate" in pre-empting the consultation process, and in the particular case of transfers felt that they were being blamed for (and being expected to compensate for) changes in rates of return and annuity rates which were not known at the time the advice was given.[76]

41. 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 IFAs, many of them very small, that those who acted properly are driven out of business. We expect the 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.

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:

    (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

 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries

© Parliamentary copyright 1998
Prepared 17 November 1998