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BeeHive  >  BeeLines  >  The importance of CP 61 and RN 53

The importance of CP 61 and RN 53

Thanks for downloading this new copy of the ‘Bee-Lines’. This issue marks a bit of a first for us really, because this time we will not be producing a printed copy for distribution by post - it is only available through our website. Is that modern or what? What this means is I should be able to get issues out in future on a steady and regular basis and at a fairly fast pace. Some issues will also be distributed in printed form. These will be in the same format as the last issue which contained the stakeholder access flowcharts that have proved to be so popular with many of you - thanks for that!

Many of you responded to the last issue and asked some very good questions about the practical issues raised by the access requirements. In fact some of the questions were so good I’ve been sort of kicking myself for not having included some of the issues raised in the ‘Bee-Lines’ in the first place. Still, it shows the process works and that between us we can really get down to the nitty-gritty of what exactly these new rules and regulations mean in practice.

The main items I want to cover this time are some of the (I think) highly significant advice issues that were first proposed by the FSA towards the end of last year and that were finally hard-coded into the PIA’s rules. In my opinion, these represent extremely good news for IFAs. I am convinced that some of these are among the most important developments I have seen so far in the ongoing debate on the distribution aspects of pensions in the new environment. Surprisingly, we haven’t seen much about these in the financial services’ trade press, probably because these nuggets of pure gold are hidden away in a mountain of documents that have been tumbling out of the numerous government bodies and departments now dabbling in pensions.

I make no apology for writing from the point of view that hard-pressed IFAs, busy with the practicalities of distribution, simply do not have the time to trawl through all this stuff themselves. Nor do they have the time, I think, to translate gobbledegook into English in a way that renders it useful in the practical process of actually explaining it to employers and employees. In effect, that is what I am doing with the ‘Bee-Lines’. I’ve read all the stuff for you, I’ve thought about what I’ve read and I’m pretty sure I understand it, and the good news is I think I’ve found a few real gems out there that you really should know about. I do hope you can use the knowledge and information here to enhance your professional standing with your clients.

The importance of CP61 and RN53

Not an inspiring title, I know, but I couldn’t think of a better one on the spur of the moment. These documents are important, though, and I will probably write more on them over the coming months, but for now I want to concentrate on the amazingly good news they contain for IFAs.

First, a bit of background. The Financial Services Authority (FSA) published a seemingly obscure Discussion Paper (DP3) in May 2000 at the same time as much of the eventual shape of stakeholder pensions was being hammered out by other government departments through their various cycles of consultation and revision. DP3 was followed in August that year with a Consultation Paper (CP61) from the FSA which set out their proposals for regulating stakeholder pensions. OK, so this has got a fairly big “so what?” factor about it, I know, but for me CP61 started to answer all the difficult questions I had had in my mind about the nature of advice in this new 1% world. In fact, I thought it was so important at the time that I made it the focus of our pensions roadshow in November last year; we called it ‘CP61 Revisited’.

I still think it is a very important document, particularly following the clarifications made by the Personal Investment Authority (PIA) in November 2000 with the publication of their Rule Notice (RN53). Now, Consultation Papers and Rule Notices come out all of the time, we’re up to CP95 and RN56 already! They come thick and fast and take quite a bit of keeping up with. They’re all important in their way, and they all need careful reading, but the CP61/RN53 combination was a bit special; I’ll tell you why.

Ever since the green paper on stakeholder pensions was published way back in 1998 there has been a kind of central theme to the whole stakeholder debate that goes something along the lines of:

  • advice is expensive and not always necessary

and

  • if the pension product is simple enough, all most people will need is information, not advice

The implicit assumption was that, by and large, most people are long-trousered enough to be able to make up their own minds when buying pensions as long as they are given the information they need first. This central theme, as we all know, ran all the way through the piece and spawned quite a few silly statements from all sorts of people who frankly should have known better.

From the outset I had been wondering how this notion would sit with the regulatory bodies once all the hoo hah and hype had died down and the real-life issues of distribution came to be addressed. It was just this that DP3 and CP61 put on the table.

It was obvious by the middle of the year 2000 that stakeholder distribution issues would centre on the selling of pensions to groups of people, rather than selling to individuals. It was the process of dealing with group presentations in real life that CP61 began picking over. There is a fine line, as we all know so well, between giving information and giving advice.

The point that came out of the discussions on this was a beguilingly simple one really. It could be posed as a question which in everyday English would go something like “How can people who don’t know what advice is, know when they are only giving information?”. A super question, a bit of a show-stopper really, a genuine humdinger in fact, and it went directly to the heart of the debate over distribution and advice.

The clarification of this when it was adopted by the PIA as a rule in RN53 is one of the most encouraging things I have read in a long time; it was a triumph of common-sense. I’ll quote the paragraph in full here, it was on pages 3 and 4 of RN53.

“The suggestion discussed in CP61 that worksite presentations; that is presentations to groups of employees, should be given only by staff authorised to give investment advice has been carried through into a Rule. Respondents to CP61 were evenly divided on the most appropriate way forward. PIA considers that the risks arising from presentations to potentially large groups of people by unauthorised staff are too great. The main concern is that the qualified adviser is likely to be better able to understand the need to make clear when he is giving no more than information and to act accordingly, particularly when responding to questions from the audience.

PIA appreciates that this Rule will apply only in the case of SHPs [stakeholder pensions]. However, it considers the requirement justified. SHPs are, by definition, intended to be marketed through employers and it is important that particular care is taken to ensure that the interests of the individual rate at least as importantly as the needs of the employees as a whole and of the employing firm.”


Wow! I can still remember the first time I read that. Yes, it did actually say that only people who could give advice would be qualified to give information at works meetings. Wow and double Wow!

There was further confirmation and clarification on this, just in case anybody misunderstood this really important point. In February 2001 the FSA published a Policy Statement on the regulation of stakeholder pensions and, specifically, on the feedback it had received on CP61. This was important because it demonstrates the close link between the PIA’s Rules and the likely Rules the FSA will adopt later on this year when the Financial Services and Markets Act 2000 comes into force and the FSA assumes its new powers and responsibilities. That date is known as N2, if you’re interested, and it’s likely to be later on some time towards the end of 2001. Until N2 the selling of stakeholder pensions will be regulated by the self-regulatory organisations (SROs) which, in this case, means the PIA. Anyway, what the FSA said was this:

“. .we consider that the risks arising from worksite presentations in the particular case of SHPs, frequently to large numbers of people, justify the requirement. We are persuaded by three main considerations.

First, SHPs are intended by the government to be mass-market products but it nonetheless remains important that only those for whom the product is suitable should buy one.

Second, where such a product is being marketed to a group of people it is important that each person as an individual is in no doubt as to the overall purpose of the presentation and whether it is giving information and generic advice or whether it is attempting to wrap up an element of personal advice (for example, if the employees were all of one trade).

Third, there is the risk that individuals could be overawed by the occasion and may consider themselves a captive audience rather than a group of individuals each with an individual decision to take. In these circumstances, employees may feel more inclined to accept the package designed for the workforce as a whole notwithstanding that it might not be suitable for them individually.

The use of authorised advisers will not eliminate these risks. But we consider that a qualified adviser will better understand the nature of the risks and how best to handle them in moving from a presentation about what is available to all to a discussion about how individuals need to consider what would be suitable for them and how the option of an information-only decision tree route or advice needs to be considered.

The phrase ‘worksite marketing’ has hitherto been used in its common sense application. However the requirement will also apply to presentations which take place other than at works premises. We have therefore made the rule such that SHP presentations may not be given at a meeting of 5 or more employees sponsored by one or more employers except by an adviser appointed by a firm to give investment advice to private customers about packaged products.”


It’s a long quote, I’m sorry about that, but it’s probably the best argument you’ll ever read for independent advice, it’s my favourite anyway.

Now, this raises some very important issues as well as shedding a great deal of light on the thinking behind the FSA’s rules. The FSA is clearly worried about the issues of suitability and takes great pains to stress that a group is a collection of very different people each with their own personal circumstances. They are saying that, as far as stakeholder pension distribution is concerned, they have concerns that groups may not be assumed to be made up of people with identical needs. This is very good and I’m glad to see it, but I am still concerned about one very fundamental point.

The Financial Services and Markets Act (FSMA), when it comes into force later this year, will in some respects only apply to regulated firms. Firms and individuals who are regulated by the Financial Services Authority are bound by their rules. On the other hand, people who are not directly regulated by the Financial Services Authority, like most employers for instance, are still required to take account of the fact that they may not give financial advice to others. It is this that it is very difficult to see operating properly in practice, particularly at this time of intense activity on the pensions front.

An employer, ignorant of the fine distinction between giving information and giving advice, could quite easily put himself in a position where he misleads some of his employees and causes them to enter into unsuitable financial decisions. It seems to me that where employers are alerted to this potential danger it would not be too much of a step for them to take to appoint a qualified adviser to assist them in their dealings with their employees’ pension options.

NOTE: If you would like to obtain a copy of RN53 or any of the other documents mentioned here they are freely available from the FSA’s website at http://www.fsa.gov.uk

Steve Bee

May 2001