Regulatory Consulting’s Insight & Foresight newsletter - August Review 2011

August Review 2011

Dear Readers

It is usual to say not much happened in August but this August was a bit different. Rioting in the streets does not really fall within our ambit even if it has an insurance angle. The turbulence in the markets is not really our subject either though it too has regulatory implications. But the FSA saved our month with its policy statement on platforms and the Workplace Retirement Income Commission produced its blueprint for better pensions saving.

No, we are not talking about gold as a safe haven for investors. Rather, it is the RDR and the consequences of adviser charging. We have predicted before that the FSA would have trouble closing out the RDR. Adviser charging was first canvassed in January 2002 in CP121. At that time it was laid down as a challenge that if independence was to have substantive meaning it should embrace the practical consequence that independent advisers should not be paid by product providers. This was shot down for very practical reasons.

Nothing has really changed save that the FSA has chosen to ignore the learning of 2002 and tried to adopt adviser charging. Now, when it comes to trying to produce a robust set of rules the FSA has tied itself up in knots. The practical learning from a public policy making viewpoint is that it is unwise to adopt a policy before all the implications have been thought through. In practice, the FSA jumped several red lights. Not least was to convene expert working groups of practitioners for no less than six weeks in 2007 and then not resort to them again. Years have passed when their free advice could have been sought and now, in 2011 the FSA discovers that on re-registration in specie, for example, new rules are not required and it may rely on an initiative by TISA. Good for TISA but a pity the FSA did not seek out practitioner help on a broader range of issues.

The issues around payments to platforms by product providers and cash rebates have proved intractable. From a position of claiming that the RDR is the most researched rule change ever, so no more research is required, to more research is needed is a u-turn. The problem is that some cash rebates are used for the good of consumers and some are not. So some quite virtuous business models could be badly penalised. There is no apparent way out of this so the research could prove awkward. The FSA couldn’t even specify accurately the delay this would cause. The rules would come into effect after 31 December 2012. Well, yes!

"Legacy" commission fared even worse: it wasn’t even mentioned in the policy statement. It then dribbled out in a semi-official announcement that the FSA would consult in September on draft guidance on the difference between acceptable trail commission and legacy commission. Presumably this will be one of the three-week consultation periods on guidance rather than new rules. Here too there appears no way out. The product providers are in no position to work out which contracts will fall into which definition since the split was not envisaged when the products were specified.

One day the RDR will finally be rolled out. Sadly, it seems likely that on the same facts some businesses will hold themselves out as independent and some will only claim to be restricted. Some business models will be impaired despite doing a better job for consumers than others that are less encumbered. The FSA could and should have done better.

The Workplace Retirement Income Commission (WRIC) addressed the very vexed subject of how to get people to save more for their retirement through their employment. This is a most worthy subject. A pity then that the authors chose to lead on the question of excessive charges and the damage done to pension pots by them. No one wants pension pots vitiated in this way but equally "owt is for nowt" as they say north of the Trent. The Commission wants people to have confidence in their pensions but perpetuates the (true) story that some pensions cost too much. It doesn’t say which ones. And it doesn’t say that experience in other countries is that keeping charges at moderate levels allows for the cost of moderate help and advice on getting the best out of occupational schemes so increasing and maintaining take-up. What is wanted is a rational, knowledgeable debate about what works on the shop floor and business park rather than fighting a cold war using old arguments.

More is the pity that the respected journalist Pauline Skypala waded into this debate joining up the WRIC report with the RDR proposals on platforms. Her claim is that the FSA clamping down on cash rebates and payments to platforms would go some way to meeting the WRIC charge capping proposals where platforms try to enter the DC pension market. The idea that everything can be done for 2bps is a nice thought but owt is for nowt. It would be better if the FSA, the WRIC and journalists could give a view about what would be a reasonable level of charge given that the market has failed.

Charge capping is a potential way forward provided some sensible means of establishing the cap can be found. In turn this requires decisions to be taken on the amount of compulsion in the market and on whom it is exerted since the charge is to cover search costs as well as other operating costs and a profit margin. Generally, the greater the compulsion the lower the search costs. When the Conservative government removed compulsion in 1988 it presumably believed that the market would work better than it has since they have stuck with Labour’s auto-enrolment proposals for NEST. But nowhere is there a joined up piece of thinking between the FSA and DWP on pensions policy. Sadly neither the WRIC nor journalists saw the need to point this out. Retirees in 2060 will bear the brunt of their lack of clarity.

Yours sincerely

The Lansons Regulatory Consulting Team

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