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The consultation gave overwhelming support for change with three-quarters of respondents favouring introducing the Government’s preferred option that I am commending. Let me quote some examples from a variety of sources illustrating the extent of that support. The Association of British Insurers, whose members provide most personal pensions in the UK, said that this package,
The Association of Investment Trust Companies said that the package,
- “will provide maximum flexibility for future development of the sector over the long term. At the same time, it will maintain the FSA’s strong oversight of pension provision”.
“Establishing a new regulated activity directly related to personal pension schemes...will ultimately benefit both consumers and the wider financial services industry”.
This overwhelming support was not surprising given that we had worked in partnership with the pension industry from the outset to make these proposed changes. As well as a formal consultation in late 2005, there have been informal discussions between the Government and a number of bodies in the financial services industry.
Let me turn to exactly what this change will deliver. While the Financial Services Authority already regulates bodies such as insurance companies and banks that provide personal schemes, a very small number of schemes and activities remain outside FSA supervision, and those elements are expected to grow in future as the pension market evolves. For example, personal pension schemes investing in commercial property would currently fall outside FSA regulation. Similarly, some persons administering pension schemes may also fall outside FSA supervision. It is only right that all aspects of personal pensions in future should be regulated by the FSA. Likewise, all elements involved in consumers choosing a personal pension, including administration, should be covered.
This change will build on the FSA’s existing role of regulating stakeholder pension schemes. It will also provide transparency and improve consumer confidence.
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The FSA already regulates many aspects of personal pensions, and it is only right that all aspects should come under FSA regulation as they develop in the future. As pension investments become more diverse, an increasing range of pension activity may fall outside the scope of FSA supervision. Without the changes I am commending there is a risk that consumer protection may fall below the current very high levels.
The order will also enable the FSA to open its doors this autumn to applicants seeking permission to carry out the new activity from April 2007. This will give maximum time for firms to prepare to become registered. The FSA and the Government have worked closely together to ensure a smooth transition for firms to the new regime. This has included waiving Financial Services Authority application fees for firms that are existing personal pension providers.
Not only do we want consumers to enjoy maximum protection, but we want them to have a choice of pension provider. As I have already explained, eligibility to establish a registered pension scheme that qualifies for tax privileges will from next April be based on having permission from the FSA to carry out this new activity. This element of the package will require a separate legislative change in the Finance Act 2004 and one to the Pension Schemes Act 1993. I can advise noble Lords that this legislative change will be made in the Finance Bill 2007, the next guarantee vehicle available, but it will have effect from 6 April 2007 to coincide with the coming into effect of the new activity.
To keep interested parties fully updated, the Economic Secretary to the Treasury in the other House announced details of the legislative timetable for making the necessary amendments. It was published on the websites of the Treasury and Her Majesty’s Revenue and Customs on 12 July. A draft Finance Bill 2007 clause and explanatory note was published on the websites of the Treasury and Her Majesty’s Revenue and Customs at the same time. I commend the order to the House.
Moved, That the Grand Committee do report to the House that it has considered the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2006.—(Lord Evans of Temple Guiting.)
Baroness Noakes: This order is basically uncontroversial and I can be brief. I say that because I know that the noble Lord, Lord Evans of Temple Guiting, is standing in for my normal opposite number. We can rest assured that by now he will have wilted in the heat of the gardens of Buckingham Palace.
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I have two questions for the Minister that cover issues that were covered in another place by my honourable friend Mark Hoban, and I trust that my request for further clarification will not prove too onerous for the Minister. My first question relates to the costs of regulation and its impact on competition. The Economic Secretary in another place talked about this order being pro-consumer, pro-competition and benefiting the industry. The Minister said as much this afternoon.
These Benches are passionate about the benefits of competition, so we instinctively find this line attractive, but we have an equal passion for minimising regulations and are concerned at the costs involved. I understand from the regulatory impact assessment that the costs for an entrant who is new to regulation will be £100,000 in the first year and £50,000 thereafter. Those are reasonably significant costs that could well deter some forms of new entrant, thus defeating the objective of increasing competition. How many new entrants to the personal pension provision industry do the Government anticipate? In the context of this order, competition can come only from new entrants, because I assume the order will have no impact on existing players in the market.
Secondly, I would like clarification about the gap between now and the order coming into effect. The order does not come into effect until 1 April next year when personal pension provision becomes a regulated activity. The Minister will be aware that there has been increasing activity in setting up SIPPs, not just because of A-day, but in the run up to it. Will the Minister explain what level of protection is currently available to people who set up SIPPs? Having set up a SIPP earlier this year, I should know the answer, but I have to confess that I made no inquiries at the time, so it is good that the Minister is here to enlighten me about the level of protection in place for consumers who wish to enter into personal pension arrangements between now and 1 April next.
Lord Oakeshott of Seagrove Bay: I should probably declare a more formal interest than the noble Baroness, as I have been a pension fund investment manager for the past 30 years and I am an active investor in commercial property and a participant in a small, self-administered pension scheme.
The noble Lord said that this order took only a third of its allotted time in the other place, but it still took half an hour. It covers seven pages and, as one would expect, the Minister’s introductory remarks were similar to those of the Economic Secretary in another place.
I was not able to give notice of this question, as I was not aware that the noble Lord, Lord McKenzie, would not be in this Committee so perhaps the Minister will write to me. Arising out of the Chancellor’s humiliating climb-down in the Autumn Statement about what is to be allowed in SIPPs, there is still uncertainty about what will be allowed on a tax-privilege basis in SIPPs. I have two questions in particular. First, will it still be possible for people to invest in residential property through SIPPs on a tax-privilege basis if, as
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As we know, widespread concern was expressed about all of this. In the other place, Mr Balls described it as a “clarification”. Well, at least he got the first two letters of that right—in fact, under sustained and heavy pressure from the Liberal Democrats, it was a monumental climb-down, rather than a clarification.
My other question is, given that what we are really talking about is commercial property, what protection will people have after this measure comes into force against some of the fly-by-night companies promoting investment in rather exotic locations? Bulgaria is a case in point, where commercial property investment is actively being promoted—a new twist in the “fly to let” investment craze—and some people in the City are concerned that abuses will continue.
I associate myself with the noble Baroness’ sensible questions about costs and coverage. I look forward to the Minister’s reply.
Lord Evans of Temple Guiting: Thank you. I am grateful to both noble Lords for their general welcome, and I shall attempt to answer the questions that were asked. As my noble friend Lord McKenzie wilts in Buckingham Palace—
Lord Davies of Oldham: He is here, as large as life.
Lord Evans of Temple Guiting: I am wilting under the pressure—my noble friend has arrived.
The first question asked by the noble Baroness, Lady Noakes, was regarding the cost of implementation. Additional costs will be minimal for existing pension providers. It was generally recognised in the regulatory impact assessment and consultation responses that some new providers would face additional costs, to the extent that they would have to become regulated and thus pay FSA fees for the first time. While the RIA made a number of assumptions about possible regulatory fees, those could only be illustrative. FSA fees are reviewed annually, together with the levies for the Financial Services Compensation Scheme and the Financial Ombudsman Service. The FSA consults each year in January or February on regulatory fees and levies that are finalised in May for the fee period of 1 April to 31 March.
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The FSA will be required to demonstrate that its fee-raising arrangements are compatible with better regulation principles; fees are expected to be proportionate and not to pose a barrier to entry into the market. For existing members there will be no impact and, under the new rules, new firms will not have to go through third parties. Obviously there will be a saving compared with the current arrangements.
The noble Baroness, Lady Noakes, also asked about new entrants. Consultation respondents identified various categories of persons who should be eligible to establish registered pension schemes. Those included firms already eligible to provide ISA and child trust fund accounts, as well as SIPP providers having to operate through eligible intermediaries.
The noble Baroness, Lady Noakes, was also concerned about protection for consumers now, before this order takes effect. Under the Financial Services and Markets Act, introduced by the Government in 2000, most aspects of personal pensions are already under FSA supervision. For example, insurance companies and banks that are active in personal pensions are FSA-regulated. However, a small number of pension schemes investing in commercial property since 2006 are currently outside regulation, as I stated in my opening remarks. Those schemes are expected to grow. A very small number of activities in the pensions chain, such as advice, may be outside supervision also, as that presently depends on whether the underlying investment in the fund is regulated. This activity is also expected to grow. We are creating this new provision so that all aspects of personal pensions come under FSA supervision.
I think that those points answer the questions put by the noble Baroness, Lady Noakes. If not, as both noble Lords have kindly suggested, my noble friend Lord McKenzie will write to them.
I will write to the noble Lord, Lord Oakeshott, as he suggested, about his first question. The changes today will absolutely maximise consumer protection. These changes will ensure that everyone advising on pensions will be under FSA supervision. The noble Lord also asked about investing in residential property through clubs. That is a Finance Bill matter, but, again, I shall write to the noble Lord.
I am grateful to both noble Lords for being so gentle with me in the absence of my noble friend.
On Question, Motion agreed to.
- The Committee adjourned at twenty-four minutes before six o’clock.
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