BeeHive > BeeLines > Personal Accounts and TCF
Personal Accounts and TCF
The Financial Services Authority (FSA) has eleven core ‘Principles for Businesses’, the sixth Principle requires authorised firms to treat their customers fairly and simply states: “A firm must pay due regard to the interests of its customers and treat them fairly.”1
This clarity of what financial services regulation is to be all about in the twenty-first century is welcome; indeed the entire text of the eleven core Principles only runs to two hundred and thirty six words and can be written on a single sheet of paper.
Last July the FSA issued a paper on the sixth Principle entitled ‘Treating customers fairly – towards fair outcomes for consumers’, you can get a copy of it by clicking on that link if you like. In that document the Regulator spelt out how firms should be focusing on delivering the following six TCF consumer outcomes:
- Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to corporate culture;
- Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly;
- Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale;
- Where consumers receive advice, the advice is suitable and takes account of their circumstances;
- Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and as they have been led to expect; and
- Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.
I’ve not met anyone from within our industry who disagrees with any of that, quite the opposite in fact.
However, this whole treating customers fairly thing keeps whizzing around in my mind when I read some of the things Government ministers are saying these days about the way the National Pension Savings Scheme (of Personal Accounts) is being designed. Unless you’ve been on Mars for the last year or so I’m guessing you’ll already know that the Government is building a new national pension scheme that will start in 2012 when around ten million2 people who do not currently have workplace pension arrangements will be auto-enrolled into it. People press-ganged in this way will have the option of getting out of the scheme if they don’t like the look of it, but the idea is that inertia will prevail and millions more people will end up saving for retirement as a consequence.
That’s all well and good, but the problem is that means-tested benefits for the elderly are now so commonplace that, even after the latest round of reforms to reign them in a bit, one in three of us will still qualify for means-tested handouts in retirement. Means-tested benefits are good for poorer pensioners, if they are smart enough to apply for them, as they can help get them out of the hole so many of the older members of our society are in money-wise in these modern times what with our Basic State Pension being a bit on the mean side and everything. But with means-testing so widespread there is the very real problem that many auto-enrolled pension savers could eventually find out that they would have been better off saving nothing as their savings will have merely offset lost means-tested benefits. Again, I know you already know all this, but maybe some of you are new to the BeeHive.
Given that there is a very real threat that many auto-enrolled savers will run the risk of losing anywhere between 40% and 100%3 of the value of their pension savings if they don’t fully understand what’s going on around them, those responsible for designing the scheme and the ‘generic’ advice that will run alongside it need to be particularly careful how they actually go about things in practice.
In the extremely unlikely event that I were to be asked to build this national scheme of Personal Accounts as a marketing manager in a regulated firm I would have to identify my target market and the potential risks that the consumer could suffer. That process would surely highlight the risks of auto-enrolment to the target group. I guess I would then ask myself the following questions:
- Is the product right for the target market?
- Does the consumer understand the risks?
- Have I explained the risks well enough to them?
- Is the ‘advice’ they have received suitable for them?
The answer to the first question is clearly both Yes and No; it will be the right product for some of them, but not for others. Ministers understand this and you will remember that in the last BeeLine I quoted the current minister for pension reform, James Purnell, as saying: “We need to have advice to enable people to make these decisions. We are not forcing people by auto-enrolling them. It does not have to be suitable for most people before it becomes justifiable to auto-enrol them.” 4
So, if it’s suitable for some people then that makes auto-enrolment all right. It doesn’t have to be suitable for most people before it becomes justifiable to auto-enrol the whole group. That sort of answers the question, or at least shows that ministers are aware that the product isn’t ‘right’ for some in the target market who will be swept into this inertia trap, and so it does rather put more emphasis on the suitability of the ‘generic’ advice that is being cooked up by the parallel review that is running this spring.
If consumers don’t fully understand the risks, or if the risks aren’t explained well enough to them then it seems highly unlikely the generic ‘advice’ they receive will be of much use to them. Generic advice clearly won’t be like the sort of advice that the FSA is talking about, under its treating customers fairly principle, when it says: “Where consumers receive advice, the advice is suitable and takes account of their circumstances.”5 Put that way what the Government is putting together seems more akin to generic ‘help’ than ‘advice’ I guess and maybe that’s the way it should be described to people just in case they get confused on such an important point.
John Hutton, the current Secretary of State for Work and Pensions, issued a press release last week that was entitled; ‘Consumers to be at the heart of new pensions savings scheme – Hutton.’ 6 They’re good words as are the following extracts from that release:
The interests of consumers will be at the heart of the Government’s proposals for a system of personal pensions savings accounts, Secretary of State for Work and Pensions John Hutton said today
“Protecting the interests of members underpins our decision to establish the scheme as a trust-based occupational pension. As such they will face the very same level of regulation as all other trust-based occupational schemes.
“This will be important in ensuring that personal accounts deliver for our target group. As we emphasised in our Personal Accounts White Paper it is essential to the success of the scheme that members’ needs remain at the core of operational decision-making.”
All good stuff, I’m sure you’ll agree, but all very difficult to achieve if the scheme itself is designed to be unsuitable for millions of those swept into it and requires them to a) understand that, and b) take action to get out of the scheme. All easy to say, but fiddly as hell to achieve in practice in the real world I think.
It seems to me that what consumers would find helpful when they are swept up into auto-enrolled savings in 2012 would be to be assured that the scheme has been put together under the treating customers fairly principle that, by then, will surely be the norm. Yes, of course, it will be reassuring too to know that the way the funds will be invested will be aimed at being in the members’ best interests, but that’s not exactly ground-breaking stuff is it? Trustees do that all the time don’t they? Once you are a member of this new scheme it will be only right that the things the minister is talking about here are properly put in place as they are for all other occupational pension schemes, but it is in deciding whether you should become a member or not in the first place where the TCF approach would be so helpful and reassuring to people.
The thing is, this new scheme of personal accounts is being built as a trust-based occupational pension scheme and as such falls outside of the FSA’s Conduct of Business rules and is regulated instead by the Pensions Regulator. Because personal accounts are not the product of a regulated firm the adhering to the principle of treating customers fairly won’t strictly be necessary. But that doesn’t mean that ministers can’t apply the principle to what they are designing, just as any other product marketing manager in our industry could.
This is a good question to ask Government ministers I think; before the rules governing the new scheme are set in legislative stone. It’s a simple question:
“Will the new national pension scheme of personal accounts be built so as to pay due regard to the interests of its potential customers as part of the auto-enrolment process and treat them fairly in the way that is required of other forms of pensions?”
A simple Yes or No would do as an answer; then we’d know where we all stand and what exactly it is we’re looking at.
I’d ask the question myself, but the trouble is the last time I put a posting on the DWP pension blog it didn’t ever get to see the light of day, so I guess I’ll have to find some other way of getting this particular question posed to the ministers. If we can contrive things so that happens and we end up getting an answer I’ll let you know what they say.
30 May 2007
Sources:
1. FSA Handbook - PRIN Principles for Businesses
2. Department for Work and Pensions - Personal accounts: a new way to save, Regulatory Impact Assessment, December 2006
3. Financial Adviser - 24 May 2007
4. Financial Adviser - 24 May 2007
5. FSA - Treating customers fairly – towards fair outcomes for consumers, July 2006
6. Press release – "Consumers to be at the heart of new pensions savings scheme – Hutton" 24 May 2007.
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