PS 16/24 and the U.K. FCA’s brave new role as price-capper for pensions | Wolters Kluwer Financial Services
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  • PS 16/24 and the U.K. FCA’s brave new role as price-capper for pensions

    By Adam Samuel

    Published January 05, 2017

    November saw the Financial Conduct Authority (FCA) trying to resolve some of the eternal problems that affect customers who already have pensions. Policy Statement (PS) 16/24 represents the regulator’s first acts as a pricing regulator given to it by the Bank of England and Financial Services Act 2016. From 31 March 2017, operators of personal and stakeholder pensions will not be able to deduct more than 1% from a pension fund on the taking of benefits, conversion or transfer between the customer’s minimum pension age (basically 55) and their expected retirement age. Policies with exit charges below that figure or none at all will not be allowed to increase those charges. Any pension schemes created after 31st March will not be allowed to impose any exit penalty between the customer’s minimum and expected retirement ages.

    The value of the benefits will be calculated from the point when the firm receives the customer’s confirmation of his or her instruction to take benefits from, convert or transfer the pension concerned. The new rule will only apply if the relevant instruction was received before 31 March.

    This will all appear as part of a new Conduct of Business (COBS) 19.6A, a chapter that seems to be growing almost every month. 

    Section 137FBB and the Bank of England and Financial Services Act 2016

    Section 137FBB entered into force in July 2016 and requires the FCA to make rules banning firms from imposing “specified early exit charges on members of relevant pension schemes, and including in relevant pension schemes provision for the imposition of specified early exit charges on members of such schemes.” As sub-section (2) points out, the aim of these rules has to be secure as far as reasonably possible “an appropriate degree of protection for members of relevant pension schemes against early exit charges being a deterrent on taking, converting or transferring benefits under the schemes.”

    The Act defines an exit charge in a rather strange way to refer to charges imposed on activities that occur “on or after the age at which the member becomes eligible to access the pension freedoms” but before the member’s expected retirement date. This is all about the Government trying to prevent pension providers from blocking access to the pension freedoms introduced in April 2015. The Early Exit Pension Charges Regulations exclude market value reductions (MVRs) from the definition of an exit charge, something confirmed by the new COBS 19.6A.3R.

    Rules have to ban the imposition of these types of charges after the rules created enter into force, regardless of whether the scheme was created beforehand. The FCA has clarified that this will apply regardless of whether the customer is a new customer or existing one. The idea is to stop firms imposing an exit charge that relates to the client’s original plan where a new contract has to be issued for administrative reasons to deal with later increments.

    The FCA’s role is limited to deciding on the level and operation of the cap in order to meet the legislative object of removing any deterrence against accessing the pension freedoms. The Government will acquire the power to cap charges in occupational schemes through the Pension Schemes Bill’s amendments to the Pensions Schemes Act 2014. So, that is not the FCA’s problem.

    Exit charges in the real world

    Overall, the FCA is acting largely although not entirely after the horse has bolted. Most pensions do not have exit charges and the Retail Distribution Review reviewed most of the justification for them. The FCA’s research suggests that only 16% of pensions held by customers over 55 would attract an exit charge. The reason for selecting 1% as the cap was that above that level, customers’ use of pension freedoms seemed to go down in the first six months of the freedoms.

    The regulator rejected the idea of a monetary rather than a percentage approach to the exit cap on the basis that it would discriminate unnecessarily against people with smaller pensions. Also, the transaction costs of transferring pension would also apply at any point when the customer chooses to take benefits.

    Much of the policy statement is taken up discussing the cost-benefit-analysis, an activity of very doubtful worth. Ultimately, the Government has decided to make the change concerned. The regulator was only concerned to work out the level at which the charge should be imposed.

    Looking forward – price-capping needed elsewhere

    The FCA has spotted that the point above 1% starts to have an impact on customer decision-making and anyway does not see any point in modern contracts having exit charges. The bigger issue going forward is whether the Government has the courage to extend the exit charge ban to all transfers. In 2003, the Treasury Select Committee suggested removing all such penalties from closed-book policies. The FCA guidance FG 16/8 has to take a much vaguer approach. The regulator expects firms:

     “to assess whether outcomes for customers paying exit or paid-up charges are fair… take action where paid-up or exit charges are the cause of unfair customer outcomes: for example, charges that consistently drive poor performance or are disproportionate relative to the purpose for which they are intended.

    Examples of actions that firms should take include: exercising any discretion or judgement regarding the level of the charge in a way that treats the customer fairly; and ensuring the customer is fully aware of the charge and the action they can take to avoid such a charge. Other actions that firms may wish to consider, as examples, are allowing the customer to move to a different product at no or minimal charge, reducing the charge that is causing the poor outcome, and enhancing the policy value.

    We also expect firms, over the lifetime of the policy, to review contracts for fairness in line with the Unfair Terms in Consumer Contract Regulations (UTCCRs) or subsequent legislation, such as the Consumer Rights Act 2015…

    Firms also need to consider the action to take regarding contracts with remaining customers impacted by the same term. If a contract was taken out before 1 July 1995, we still expect firms to assess whether the customer is receiving a fair outcome in line with Principle 6 when carrying out a product review, and to take into account the drivers of that outcome which would include an assessment of the impact of the T&Cs

    Whether the UTCCRs apply or not, the firm should be able to justify the way in which a term is applied in practice to ensure it is applied fairly. If the justification for it being fair is that it is to recover set-up costs not yet recouped, rather than assume that this is the case, we expect firms to be able to satisfy themselves that this is a supportable position and be able to demonstrate this is the case on an ongoing basis. We expect firms to be able to show that their management and controls are responsible and effective.

    We expect firms to review products periodically to check whether they are meeting the general needs of the target market, or whether their performance will be significantly different from what the firm originally expected and communicated to the customer. For example, for pension products, we expect firms to consider whether contracts that incur charges when contributions reduce/cease or the policy exits ahead of a retirement date selected at outset continue to meet the needs of customers, particularly in light of current pension reforms and continuing changes to employment patterns.

    In line with TCF outcome 6, we expect firms to monitor the extent to which paid-up and exit charges result in unreasonable barriers to changing product or switching provider, and consider appropriate action as a result. An example of this is to monitor customers’ exit requests/enquiries and whether they proceed once they become aware of the exit charge, or whether the firm receives complaints about the level of such charges, once the customer has been made aware of them.” 

    Final thoughts

    The Government’s motives for requiring the regulator to impose an exit-charge cap may be more to do with encouraging the public to use options that may not be in their best interests. However, it is not difficult to spot the advantage of imposing such a cap for a 56 year-old whose pension is locked in a dead with-profits fund or a limited range of poorly performing unit-linked options. The regulator’s next step really ought to be banning exit charges altogether. Providers will argue that their set-up costs are paid for through early exit penalties. As PS 16/24 shows, that is not really true anyway since the RDR removed providers’ needs to make large up-front payments at the beginning of each pension contract.

    About the author: Adam Samuel is a lawyer and compliance consultant and the author of the only major book on financial services complaint handling. He combines diploma level qualifications with the CII, a complete set of certificate level CII exams, the CISI Diploma in Compliance with merit with his background as a barrister and attorney. Formerly the second PIA Ombudsman and an IOB Ombudsman's Assistant, Adam sits on the Ethics Committee of the Institute of Financial Planning and sat for seven years on the Practice and Standards Committee of the Chartered Institute of Arbitrators of which he was also the chairman of the Arbitration Sub-Committee for four and a member for ten. Adam is a regular contributor to Wolters Kluwer Financial Services’ Compliance Resource Network.

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