Robin Ellison says regulators are good at grandstanding but bad at protecting savers
There have been two astonishing happenings in the last few weeks. First HM Revenue and Customs (HMRC) issued a guidance note on pensions liberation, which said it was the duty of the member to take care before engaging in liberation. And second, the chief executive of the Financial Conduct Authority (FCA) made a speech in March which involved a 180 degree reversal of course, when he said that consumers have a responsibility to use their pension freedoms, er, responsibly.
In legal Latin, now outlawed in England and Wales, that used to be called ‘caveat emptor', ie ‘let the buyer beware'. But for several decades now that phrase has been outlawed by the financial services regulators, both in English and Latin, so that nowadays it is the vendor who is responsible for checking that the consumer is protected against himself.
What has prompted this extraordinary (and welcome) change of policy? Well it looks to be the new pension freedoms. Those freedoms, which seem to be changing by the day, will themselves do more damage to consumer protection, even if there is no fraud by the bad guys out there. But they may have one small benign effect, if only to emphasise the fact that the regulators, who are fining people and institutions fit to bust at the moment, are in fact paper tigers.
Because the truth is that now that pension holders can cash in their pension rights they will do so not to buy that famous Lamborghini, but rather to buy a forest in Cambodia, or a villa in Brazil, because the interest rate at their local bank will not buy them a cup of coffee. And while some may see their investment yield more than they would have expected in an annuity, in many cases the money will vanish in a feat of prestidigitation that Houdini would envy. So far pensions liberation has cost consumers £600m (ie stolen), and there is no compensation system to help them; the next scandal is just about to emerge and will involve much great sums.
The entire and fantastical superstructure of HMRC, The Pensions Regulator (TPR), FCA and the others is able to do little about it. There is no recompense (because it is stolen by non-regulated people), and it is unlikely that the Serious Fraud Office (SFO) will be involved (because the sums are individually relatively small, and anyway the bad guys live abroad and the SFO only do prosecutions where there is no crime involved, such as in the Davies case where a barrister gave advice they didn't like) so few if any people will go to prison.
It is unsurprising that the regulators are getting in their excuses first. The FCA and HMRC are simply the first; TPR will also soon say the same. And the reason is that while they are grandstanding and fining (just look at the list day by day on the FCA website), and consumers are paying the end-cost of the expansion of compliance officers (JP Morgan hired 13,000 additional compliance officers in 2014) there is little that the regulatory framework can do (or wants to do) anything about it.
If that is the case, and while pension scheme trustees who are the only ones trying to help are being hung out to dry by TPR and the Pensions Ombudsman who both refuse to give a safe harbour to trustees who refuse to transfer to suspicious entities, then we need to ask ourselves: should we revert to caveat emptor more widely? That doesn't mean a free-for-all. If providers or advisers lie or steal they should pay the price; it involves using the law rather than regulation. But it does also mean that the consumer has a duty to take care about his money; it's not difficult - he can cruise the internet and chat to his friends in the pub. But he cannot be cavalier in the expectation that the system will bail him out when it goes wrong.
And we could then cut back the absurd thicket of regulation which attempts to do the impossible. Martin Wheatley seems to have rather late in the day adopted the apocryphal story of Cnut who knew he could not turn back the waves. There are some things that regulators simply cannot do. And then grandstanding penalties (look at the Final Notice for Stephen Edward Bell on the FCA website for example) will be seen for what they are: ie fiddling providers and advisers while consumers are burning, to mix some historical metaphors. The FCA last month, for example, issued a slew of papers on governance and on fees, issues which are secondary for the consumer, as the Wheatley speech indirectly recognised.
So now that the regulators themselves have acknowledged that the system as it stands cannot protect the consumer, we might explore whether it is time to disband this dysfunctional and expensive and complicated framework, and instead use some of the money to beef up the police resources to control fraud, and hire a few more judges and prison officers. And maybe also punish a few politicians who have exploited a populist theme which will have the collateral damage of allowing people to be robbed of their retirement expectations.
Robin Ellison is head of strategic development for pensions at Pinsent Masons
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