Last year, Charles Randell, the chair of the Financial Conduct Authority (FCA) remarked that, with hindsight, more could have been done to protect consumers from the risks introduced by freedom and choice.
He was right and it's welcome that the regulator recognises this. It's tempting to see shades of that recognition in their proposed approach to the regulation of pensions dashboards, on which they seek views.
Pensions dashboards will be online portals that will show individuals' pension entitlements in one place and in a common format.
They will work by linking pension providers to a central digital architecture - essentially a search engine for pensions. Individuals will log in, either to a dashboard provided by the Money and Pensions Service, or to a dashboard provided by a commercial provider and be able to securely summon up their pensions information from all their providers via this central architecture.
This remains an exciting step forward for engagement with pension saving. But like anything of enormous value, it carries risks as well as benefits. One category of risks and benefits - addressed by the FCA in their consultation - are risks posed by commercial operation of third-party dashboards.
The FCA's consultation proposes limitations on the main ways in which commercial providers might use dashboards as a sales and marketing channel. Earlier this year, the DWP had consulted on whether or not it would be allowable for customers of a dashboard to export their data from a dashboard to a pension provider. This was seen to have a number of upsides - a user logging in to the ABC Lifeco dashboard would have been able to export their data to the ABC Lifeco retirement planning suite, for example.
But other, more controversial, things could have been possible. Users could have logged on to the ABC Lifeco dashboard and then exported their data into consolidation or product sale customer journeys. It would have been possible to design a streamlined system that would have allowed customers to transact with their entire defined contribution entitlement, potentially in one sitting.
The FCA proposes putting tight limits on data export, specifically banning the export of data into product sale or transfer customer journeys. It proposes allowing data export into advice and guidance services but under tight controls. They also propose banning marketing on dashboard services and on services that a customer might view after they have used a dashboard.
We think this is the right approach and dashboards should remain an engagement tool in the short term. In the medium term, we think that there is a case for allowing people to transact on dashboards and we see tighter integration between pensions and other financial products as inevitable and desirable. It's an easy step on from seeing your pensions all in one place to seeing them in the same portal as your current account, mortgage and ISA.
Several things need to happen before we start getting to this place, though. First, we need to understand consumer behaviour on pension dashboards. We are talking about the regulation of a market that is over a year away from launching and we do not understand how consumers will use the product. Further evolution of what's allowed on dashboards should be informed by how consumers use them, which will give a better understanding of how to manage the risks and benefits.
Second, we need to see reform of pensions transfers. At the moment, various things exist that are intended to make some products seem better value than they are.
For example, cash incentives contingent on transfer to high charge funds and products serve no consumer benefit. Transfer incentives exploit weaknesses in human decision making as people tend to value a seemingly large lump sum more than a "small" percentage charge. Before there can be any further streamlining or automation of consolidation through dashboards there should be a conversation about transfer incentives and online financial promotions.
Third, we need to see pension transfers as more of a comparison shopping experience, potentially powered by transparent metrics. DWP, the FCA and TPR intend to bring forward value for money metrics shortly that will focus on costs and charges, investment performance and customer service and scheme oversight. Initially these are intended for professional use but have the potential to reshape consumer decision making in the transfer market. These should cover both retail and workplace pensions and should evolve to help consumer take decisions about how to combine pensions. Better transparency about where value is in the pensions market should enable better consumer decision making.
Assuming that the FCA do not amend their approach following consultation, all of this is now some way off. It's welcome that they have looked at this exciting new market and decided that consumer protection should take precedence over commercial use of dashboards.
Too often in UK financial services we have seen a cycle of consumer harm as new markets open followed by select committee enquiries, angry headlines and expensive consumer redress schemes. This is not a sustainable model for innovation and causes distrust in pensions. Commercial innovation in pension dashboards should come eventually but only after a careful evaluation of the risks and benefits.
Tim Gosling is head of pensions policy at People's Partnership, provider of The People's Pension