43.Though published statistics are very limited, on the whole we heard that consumers, pension providers and advisers appear to have responded well to pension freedom. However, we were told by the same witnesses that some problems affecting a minority of cases remained. We particularly focused on circumstances where individuals may not have access to the guidance or advice they need to make informed decisions about what to do with their savings. These circumstances were often termed “advice gaps”. In considering closing these advice gaps, we were mindful that:
44.The Treasury and FCA launched a Financial Advice Market Review (FAMR) during the course of our inquiry. The FAMR will consider advice gaps, barriers to both giving and seeking advice, means of clarifying regulation, and emerging advice technologies. It intends to produce policy proposals before Budget 2016. Though the FAMR spans far wider than pensions, there is clear overlap with our inquiry. In addition, the FCA opened a consultation on proposed changes to its pensions rules and guidance in October 2015. Our intention is to contribute to these reviews by identifying priority areas for action and exploring potential remedies.
45.The FCA identified access to financial advice as a key concern about progress of the reforms. Regulated financial advice differs from guidance in that advisers can recommend specific providers and products based on an individual’s particular circumstances. The NAPF found that, of workplace savers it surveyed, just 43% were willing to pay anything at all for advice while only 3% were willing to pay over £200. By contrast, APFA told us that the typical fee for an initial advice session with an independent financial adviser might be between £600 and £1,000. Aviva told us that stricter regulation and qualification requirements had rendered financial advice “a luxury good—just at the point where it is needed more than ever by typical savers entering retirement”. Chris Hannant of APFA acknowledged that the traditional model of bespoke, face-to-face advice was expensive; he compared it to Savile Row tailoring when the demand was for Marks & Spencer.
46.Tom McPhail said the industry needed to do more to make private guidance and advice more accessible. Partnership Assurance Group identified the gap as the “middle ground” between regulated advice and guidance. There is evidence of market entry to address this gap. We heard about a £199 plus VAT fixed-price fully-regulated online advice service and a £399 plus VAT “enhanced guidance” session with a financial adviser. The FCA told us that they were working with companies interested in providing “robo-advice”, automated online advice, and said that their Project Innovate scheme to challenge existing business models and encourage new services was engaging with incumbent firms to reduce regulatory barriers to innovation. Chris Curry said it was “almost certain” there would be further innovation as the market grew, partly driven by the larger typical pension pots that will be generated by the policy of auto-enrolment to pension schemes. Teresa Fritz, pointing to an increase in low-cost telephone advice services, said it was important not to panic about the advice gap and lower regulatory standards unnecessarily.
47.Others sounded words of caution, suggesting regulatory uncertainty was affecting the guidance and advice market. This was acknowledged by the Treasury and FCA in the terms of reference for the FAMR, which made specific reference to overcoming regulatory barriers and seeking to provide regulatory clarity to facilitate innovation and growth. Witnesses to our inquiry repeatedly returned to the distinction between guidance and advice.
48.We heard that consumers struggle to distinguish between advice, in which a specific product may be recommended by a regulated adviser, and guidance, which will provide an explanation of types of product but not a specific recommendation. The Investment Association told us that, “for most individuals, the dividing line will be extremely unclear”. This is perhaps no surprise: the dictionary definitions of the terms are almost interchangeable. It also does not help that free services providing guidance, but technically not advice, on pensions are called The Pensions Advisory Service, Citizens Advice and the Money Advice Service. The 2014 Budget documents detailing the pension freedom policy referred to a “guidance guarantee”, but in his speech the Chancellor referred to a “right to advice”. It is understandable that consumers may be reluctant to pay for independent advice if they cannot distinguish it from free support, or think that their adviser will try to sell them a product.
An adviser or firm that provides independent advice can consider and recommend all retail investment products that could meet customer needs. Their advice is unbiased and unrestricted.
A restricted adviser or firm can only recommend certain products or product providers. The adviser or firm has to clearly explain the nature of the restriction. This might be that they work with one product provider and only consider products that company offers. They cannot describe their advice as ‘independent’.
When a customer has been given general information about one or more investment products, or had products or related terms explained to them, this is likely to be ‘guidance’ rather than ‘advice’. This is sometimes also called an ‘information only’ or ‘non-advice’ service. Following guidance, the customer decides which product to buy without having received a recommendation. Such customers do not have recourse to the Financial Ombudsman Service or Financial Services Compensation Scheme if they make a poor decision.
49.We were told that pension providers and advisers would also appreciate greater clarity in the distinction between advice and guidance. Fidelity told us the difference was “clouded by regulatory interpretation”. Dr Stuart Grierson, an independent financial adviser, said that the point at which the expression of an opinion became a personal recommendation, and therefore advice, was not clear. While the FCA’s efforts to clarify terminology were laudable, it was doubtful whether anyone other than a compliance specialist could understand them. FCA guidance designed to clarify the boundaries of advice published in January 2015 extends to 47 pages. The NAPF told us that “employers and schemes are keen to signpost members to appropriate external solutions, but are hampered by the fear that they will be seen to have strayed into giving individual advice”.
50.Aviva argued that an additional category of services, between advice with a personal recommendation and general guidance, was necessary to help consumers navigate pension freedom. This would be facilitated by extending the definition of information-only support. Strict qualification standards for advisers and the potential liability of providing regulated advice meant it would remain prohibitively expensive for many. Chris Hannant told us the existing advice model was set up for long-term advisory relationships and the ability to provide more focused, transactional advice on one particular decision would be welcome. However, were this change to come about, he had concerns that, regardless, advisers might be held more broadly liable for a client’s financial decisions. A recurring theme in our evidence was that confusion over the limits of liability and fear that rules would be reinterpreted over time were discouraging the provision of advice. This was a particular problem where consumers are required by law to obtain regulated advice before being allowed to proceed with a decumulation decision.
51.Under the terms of the Pensions Schemes Act 2015, trustees or managers of a pension scheme must check that individuals have received appropriate independent financial advice before allowing a conversion or transfer of “safeguarded benefits” into flexible benefits (such as cash, drawdown or a typical annuity). Under a subsequent regulation this requirement applies where the total value of the safeguarded benefits is more than £30,000. This measure was aimed primarily at protecting consumers with generous defined benefit pensions. However, the definition of safeguarded benefits extends to guaranteed annuity rates (GARs) and guaranteed minimum pensions (GMPs), which are a feature of some defined contribution schemes. The Financial Services Consumer Panel welcomed this consumer protection but noted that it was logically inconsistent to protect certain groups, but not others, from taking decisions that were not likely to be in their best interest.
52.We heard that there was confusion over what constituted a safeguarded benefit. Aegon, for example, told us that there was “considerable ambiguity” over how GARs should be valued. The Society of Pension Professionals pointed to a lack of clarity over the treatment of GARs in certain circumstances. Where the boundaries of safeguarded benefits were unclear, providers tended to err on the side of requiring advice. This could deter customers from exercising freedom and choice by requiring them to take unnecessary and expensive advice.
53.In other circumstances, pension providers are requiring customers to take advice when not obliged to by law. The Pensions Regulator found that one-third of schemes required members to have taken independent financial advice before all transfers out of their scheme, while one-sixth required advice to have been taken for all transfers in. The Money Advice Service took a call from someone with a defined benefit pot of £164 who said they had been told to seek regulated advice. Fidelity told us that they believe accepting transfers of defined benefit transfers under £30,000 where advice has not been taken is too risky even though it is permitted in legislation.
54.A key perceived risk to pension providers and advisers is potential liability. In particular, we heard concerns about “insistent clients”, people who take advice but choose a course of action different to that recommended and instruct their adviser to facilitate the alternative transaction. Kelvin Financial Planning told us that they had experienced people “asking us to treat them as insistent clients and just sign the paperwork and charge them”. Though the FCA published a factsheet in June 2015, advisers said that the guidelines were insufficient. Many advisers were choosing not to provide advice to insistent clients, citing fear that regulators or ombudsmen could, in future, hold them liable. Similarly, survey data from the FCA and TPR suggested that a large proportion of pension providers were unwilling to accept transfers from insistent clients. The FCA acknowledged widespread concern about future liabilities in their evidence.
55.The ABI proposed a “customer control” mechanism, delivered through a targeted free guidance session, to replace the legislative requirements to take advice. This, they argued would “allow providers to carry out customer wishes without fear of future redress actions or retrospective regulatory action where the correct steps have been followed”. Similarly, True Potential stressed that “advisers must be confident they will not be punished for events beyond their control”. One option we heard was the introduction of a regulatory “safe harbours”. This would, in particular circumstances, protect advisors or providers from being sued so long as they had followed certain steps. In effect, it would transfer liability from the adviser or provider to the consumer. Consideration of this policy is an explicit part of the terms of reference of the FAMR. The NAPF suggested trustees might be permitted to signpost savers to good retirement products, particularly where they could not provide the full range of pension freedom products directly. The Open Retirement Club concurred that a safe harbour could provide greater clarity to employers and trustees about the support they could provide. Fidelity suggested that safe harbours might, for example, encourage firms to accept transfers from defined benefit schemes. However, Chris Woolard sounded a word of caution, suggesting that allowing people to charge for advice but not take responsibility for it would be “a step too far”.
56.In Chapter 1 we detailed the difficulties consumers face in making decisions about their retirement finances. Such problems can be exacerbated by jargon, hidden charges and unnecessary complexity, which further restrict the exercising of informed choice and undermine what trust in the sector remains. The ABI told us they were working with free guidance providers and other industry bodies to establish standardised language. The Investment Association said that “the industry collectively must do more to ensure that value for money is better communicated and that this should start with improved transparency of charges and transaction cost disclosure”. The Financial Inclusion Centre argued that enhanced rules on disclosure were required to ensure that the risks of annuity-replacement products were better understood.
57.We also heard evidence on the unwarranted complexity of some charges. During the course of our inquiry, a report suggested that fees for drawdown products for those with smaller pots were like budget airline charges: what was advertised often bore very little resemblance to the total cost. We put these findings to the FCA and the Minister. David Geale told us that FCA rules require firms to set out charges clearly, meaning there “should not be any surprises for consumers”. He conceded that “some clearly do that better than others”. He added that the FCA had launched a discussion paper on “smarter communications” and would be further surveying charges. The Minister indicated that the Government was prepared to intervene if problems with charges persisted.
58.Other witnesses stressed that Government and regulators, as well as industry, had to accept some responsibility for confusing communications. Huw Evans said that Ministers had been irresponsible with consumer expectations by implying that pension pots could be used “like bank accounts”, neglecting the very different tax liabilities involved. Citing the notorious “uncrystallised funds pension lump sum”, the ABI called for complex jargon used in legislation and regulation to be replaced by more consumer-friendly language.
59.Despite promising signs, the pension freedom market is clearly not yet operating entirely as it should. For consumers, already daunting terrain is more difficult to navigate than it should be as there are gaps in the availability of support. In particular, provision in the middle ground between free guidance and traditional but expensive face-to-face independent financial advice is woefully inadequate. As long as this gap persists, consumers are at risk of making poor decisions with their life savings.
60.To their credit, industry and regulators alike have identified the affordable advice gap as a problem. We heard impressive examples of innovative products and over time we expect the market to adapt to largely close the gap. The future of financial advice and guidance is clearly predominantly online and interactions will be increasingly focused on single transactions. The role for regulators is to enable innovation and market entry by adapting to these changed circumstances.
61.Complexity is a major obstacle to the smooth operation of the market. It restricts both demand and supply. Too many consumers do not understand what they are buying, either in advice or in financial products with jargon-laden descriptions and pricing structures that if conceived to confound could hardly be more convoluted. Understandably risk-averse providers are hesitant to bring new advice or pension products to market because of insufficient clarity surrounding the regulations that govern their operation.
62.We encountered several examples of regulatory opacity. The boundary between guidance and advice is a mystery to consumers and providers alike. While we welcome the concept of safeguarded benefits, it is imperative that these protections are proportional and clearly bounded. Managing the “insistent client” problem is a delicate balance: consumers must be protected and memories of mis-selling scandals are still fresh. We have yet to be persuaded by the case for relaxing regulation to provide providers and advisers with “safe harbours” from liability. However, for pension freedom to operate effectively, it is necessary to ensure that people can get advice and, once informed, can take decisions contrary to that advice. Greater clarity would be an important first step.
63.Examining the affordable advice gap rightly sits at the top of the priorities of the Financial Advice Market Review. In the pension freedom market, closing the gap should be the first policy objective of Government and regulators. The second, related, policy objective should be clarification and simplification.
65.Accessible language and transparency about risks and charges should be central to the simplification process. We recommend the FCA bring forward new stronger rules and guidance for standardised language, and transparency in pricing, for pensions and associated advice. Once in place, it is important that these rules are strictly enforced: unnecessary complexity is as much an enemy of a smoothly-functioning market as more obvious regulatory transgression.
66.The FAMR is aiming to produce policy proposals in time for Budget 2016. The FCA intends to publish its final new pensions rules in the second quarter of 2016, with implementation to follow. Despite operating in an environment of very limited information, our inquiry has uncovered both evident shortcomings of pension freedom and possible solutions.
67.The Government and FCA have ready access to a wealth of data. Where these data point to clear problems and potential remedies, they should act more quickly than their review timetables imply. Ongoing monitoring will enable such measures to be adjusted over time.
112 (Huw Evans)
113 (Chris Curry)
114 HM Treasury, , August 2015
115 Financial Conduct Authority, , CP15/30, October 2015
116 Financial Conduct Authority ()
117 Financial Conduct Authority, , March 2014
118 National Association of Pension Funds ()
119 Association of Professional Financial Advisers ()
120 Aviva ()
121 (Chris Hannant)
122 (Tom McPhail)
123 Partnership Assurance Group ()
124 LV= (), FT, 23 June 2015, , by Judith Evans and Josephine Cumbo
125 (David Geale)
126 Financial Conduct Authority ()
127 (Chris Curry)
128 (Teresa Fritz)
129 Association of Professional Financial Advisers ()
130 HM Treasury ()
131 (Chris Curry)
132 The Investment Association ()
133 The defines “advice” as “guidance or recommendations offered with regard to prudent action” and “guidance” as “advice or information aimed at resolving a problem or difficulty, especially as given by someone in authority”.
134 Which? ()
135 HM Treasury, ,HC 1104, March 2014, para 1.160 and
136 Dr Stuart Grierson ()
137 Financial Conduct Authority, , March 2014. Regulated advice is an activity specified . The defines “pensions guidance” as “guidance given for the purpose of helping a member of a pension scheme, or a survivor of a member of a pension scheme, to make decisions about what to do with the flexible benefits that may be provided to the member or survivor”.
138 Fidelity Worldwide Investment ()
139 Dr Stuart Grierson ()
140 Financial Conduct Authority, , FG15/1, January 2015
141 National Association of Pension Funds ()
142 Aviva (PFA0030)
143 (Chris Hannant)
145 regulation 5
146 In a defined benefit (DB) pension the benefit an individual receives is fixed and calculated using a formula; it is not dependent on the success of investments. Typically it is linked to an individual’s salary and the length of time they worked for an employer. By contrast, a defined contribution (DC) pension is one where an individual builds up a pot of money. Contributions are paid into the pot, usually on a regular basis by the individual themselves, and often their employer, and this money is invested. The size of the eventual benefits depends on the amount that has been paid in, the length of time each contribution has been invested, investment returns over this period, charges deducted from the pot and the individual’s choices at retirement.
147 states that “safeguarded benefits” means benefits other than— (a) money purchase benefits, and (b) cash balance benefits.
148 Financial Services Consumer Panel ()
149 Association of British Insurers (), (Huw Evans)
150 Aegon ()
151 Society of Pension Professionals ()
152 Which? ()
153 The Pensions Regulator, , September 2015, p2
154 The Money Advice Service ()
155 Fidelity Worldwide Investment ()
156 Financial Conduct Authority, , Factsheet for advisers no.35, June 2015
157 Kelvin Financial Planning ()
158 Association of Professional Financial Advisers (), True Potential ()
159 Kelvin Financial Planning (), True Potential ()
160 Financial Conduct Authority, , September 2015 p13 and The Pensions Regulator, , September 2015, p41
161 Financial Conduct Authority ()
162 Association of British Insurers ()
163 True Potential ()
164 HM Treasury, , August 2015
165 National Association of Pension Funds ()
166 Open Retirement Club ()
167 Fidelity Worldwide Investment ()
168 (Chris Woolard)
169 Bernard Casey and Noel Whiteside, , January 2011
170 Association of British Insurers ()
171 The Investment Association ()
172 Financial Inclusion Centre ()
173 FT, 11 September 2015, by Josephine Cumbo
174 (David Geale)
175 (David Geale)
176 (Harriett Baldwin MP)
177 Daily Telegraph, 13 October 2015, , by Steven Swinford and Dan Hyde
178 (Huw Evans), also Gresham Financial Planning ()
179 For example,
180 Association of British Insurers ()
181 HM Treasury, , August 2015
182 Financial Conduct Authority ()