This was the stark warning issued by the Commons' Work and Pensions Committee in its report published on 19 October 2015. The report came six months after the introduction of the new pension freedom reforms announced in the 2014 Budget, and the Committee was concerned with highlighting the absence of a basis for a well-informed choice to pension age people wishing to access the cash in their pension pots.
In the first three months of the new regime more than 200,000 people had withdrawn monies from their pension pots, more than double the number in the same period in 2013. The Committee noted the low take up of the Pension Wise service provided free of charge by the government. Research showed that around 70% of those retiring could not afford or were unwilling to pay for independent financial advice.
Frank Field, the chair of the Committee, highlighted the need in the new pensions freedom environment for "good quality, co-ordinated and accessible guidance and advice ... to ensure people make the best, informed decisions about their retirement savings ...".
In October 2015 the Financial Conduct Authority (FCA) published a consultation paper entitled "Pension reforms – proposed changes to our rules and guidance" inviting those with an interest in pensions and retirement issues, including individuals and firms providing retirement and pensions advice and information, to comment on the FCA's expectations of how the existing rules and guidance would operate in the new environment and on further proposed changes to the COBS rules.
Recently (April 2016) the FCA has published the feedback received from interested parties together with the prescribed final rules and guidance. Some of these rules will not come into force until April 2017, but other amendments to the FCA's Code of Business Sourcebook (COBS) will take effect in April, June or October 2016.
The changes made to the COBS regime in relation to pension information and advice are timely and welcome. The new rules extend the existing protection afforded to persons of retirement age when receiving advice or a recommendation from their pension adviser, for example:-
- where advice is given in the context of lump sum withdrawals, the adviser has a responsibility to explain the implications attached to a pattern of withdrawals. Importantly the suitability rules and guidance in COBS 9 apply to such advice.
- when advising a retail client on transfer out of a defined benefits occupational pension scheme or other scheme with safeguarded benefits, the adviser must start by assuming that the transfer will not be suitable. The adviser can only consider the transfer if he can clearly demonstrate, on contemporary evidence, that the transfer is in the client's best interests: COBS 19.1.6.
- money held in a pension wrapper will be excluded from the calculation of net investable assets in relation to High Net Value Investor and Restricted Investor certification. The purpose of the new rule is to protect clients (who would not be considered high net worth investors while the funds were in their pension wrapper) from inappropriate promotion of or excessive investment in restricted investments. Such pensions savers will moreover benefit from the general protective regime of COBS because they will be categorised as retail clients irrespective of the size of their pension pot.
- when advising in favour of transferring accumulated pension monies out of a defined benefits pension scheme or other pension scheme with safeguarded benefits, the adviser must provide detailed comparisons of the benefits of the existing and the proposed schemes as prescribed by new and detailed rules in COBS 19.1.2R and 19.1.4R and 19.1.3G.
- in addition to the existing requirements that advisers communicate fairly, clearly and not misleadingly (COBS 4.2.1R) about their client's options of accessing pensions savings and comply with the best interest rule (COBS 2.1.1R), new rules in COBS 19.4 require the adviser to provide the client with detailed information about the options for use of his pension monies in schemes available in the open market by way of an Open Market Statement. The matters to be included and the timing of the Open Market Statement are strictly prescribed.
The additions to the COBS rules require pension advisers to provide further and more detailed information and (where appropriate) advice to clients of pension age. Breach of the COBS rules will provide clients with a route to relief whether through the Financial Ombudsman Service (FOS) (recoverable damages currently capped at Ł150,000) or the courts (by section 138D of the Financial Services and Markets Act 2000), where non-conforming advice has led to loss of pension capital or income. The purpose of the expanded regime is to assist clients in making informed decisions about the use of their pension monies, and that purpose is likely to be central to how FOS and the courts will construe the content, scope and obligations (imposed on the adviser) of the new rules.
Currently complaints to FOS about pensions run at just over 4,200 per annum. In the year ended 31 March 2015 FOS recorded a significant increase of complaints from persons saving for retirement in self-invested personal pensions (SIPPs). According to figures published by FOS three quarters of those complaints involved advice to invest in an unregulated collective investment scheme (UCIS). FOS has also recorded that it finds in the consumer's favour in a high proportion of the pension mis-selling complaints received. Another frequently encountered breach of the existing COBS rules concerns advice in favour of an investment of pension money held in a SIPP wrapper into a product or scheme outside the client's attitude to risk and/or beyond his understanding of the risk assumed in the proposed investment. Pension investments in wines, diamonds, storage pods and the like are some of the more obvious examples. Insurance wrapper bonds based on underlying bundled investments outside the client's attitude to risk have similarly fallen foul of the suitability rules in COBS 9.
Professional negligence practitioners at No5 Chambers will await the effect and the efficacy or otherwise of the new rules with interest. While the rules are primarily intended to provide much required protection to consumers with access to their pension pots, if things do go wrong, they will undoubtedly assist complainants in obtaining relief in relation to losses suffered via FOS or the court route.
Originally published on 18 May 2016
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