Pension freedoms has led to 'significant risk of harm' to investors - FCA

The introduction of pension freedoms has partly driven a "significant risk of harm" to pension investors, the Financial Conduct Authority (FCA) has said.

The regulator stated that it had observed the risk of consumer losses and fraud in the pension investment market, which was "part driven" by giving consumers additional responsibility for complex investment decisions.

This included pension freedoms, introduced by the government in 2015, and the shift to defined contribution (DC) schemes.

Drawing attention to the issue of unsuitable investment decisions, the regulator's 2020/21 Business Plan highlighted the “catastrophic” consequences for consumers, with most of those scammed losing an average of 22 years’ worth of pensions savings.

In particular, it added that the investment distribution process, and the support network around it, is not working well enough for consumers to make effective decisions about their investments.

As a result, the FCA has launched a consultation into support for an industry-funded consumer campaign to support member decision making.

The regulator explained: “We want consumers to have access to high-quality advice and support, and be aware of how to protect themselves from scams and fraud. An area where we have seen increasing consumer harm is retail investments.

“To help tackle this we are proposing a consumer harm campaign to initially help consumers make better-informed investment decisions."

Addressing two of the FCA's operational objectives, market integrity and consumer protection, the campaign will build upon the work of Scamsmart, with consumers investing in high risk, high return, illiquid investments being particular targets.

The regulator stated that a consultation was “the most transparent and fairest approach” to fund the activity, and has proposed raising £2.3m in 2020/21, allocated proportionately across all firms.

It has clarified however, that minimum fees will not be affected by this.

Small-scale intervention campaigns have already been tested for effectiveness, with early evaluations indicating that consumers are not always aware of what the FCA actually regulates, or fully understanding the individual protections they have when making investments.

Campaign planning will be initially informed by research focusing on what drives and motivates audiences, existing levels of awareness, and how they consume media.

However, the regulator has clarified that there will be room to review and assess the campaign, as markets and consumer threats evolve.

The FCA explained: “We recognise that markets change and evolve quickly – the greatest source of harm today, may be less acute in the future.

“To ensure that the overall campaign reflects the dynamic nature of markets, we will review and assess where the greatest and most acute areas of harm exist, and adjust our campaign to address them.

“We will do this by continuously monitoring industry intelligence, consumer contacts to our consumer helpline and feedback on the campaign messaging.”

The information campaign is one of three outcomes that the regulator is targeting to improve member support in the pensions and retail investment space.

Ensuring investment products are appropriate for consumer needs is another target outcome for the regulator, with a particular focus on ensuring products deliver value for money and are marketed in a “fair, clear and not misleading way”.

The regulator has also shown a close focus on governance, stressing that firms and individuals should be operating and acting in consumers best interests.

It emphasised: “We want to ensure firms have higher standards of governance, a stronger grip over networks of individuals in their distribution chains and that the regulatory system can better tackle the significant cost of misconduct we see in this market.”

The consultation, and broader focus on supporting effective consumer investment decisions has been broadly welcomed by industry experts.

Commenting on the announcement, Hargreaves Lansdown head of policy, Tom McPhail, added: “Consumer confidence in a safe and effective retail investment market is vital to ensure people can save and invest for their future.

"A great deal of good progress has been made, however it is a constant battle against both the fraudsters and the complexity of a market with which many people are unfamiliar in their day to day lives.

"They often need help and guidance and it needs to come from trusted partners; this initiative should help to achieve these aims, we welcome it and look forward to continuing to work with the FCA.”

The business plan has also emphasised the unprecedented impact of the coronavirus, acknowledging that this had made planning ahead much harder for the regulator.

It stated: “Where we can take this work forward now, without diluting our focus on the impact of coronavirus, we will. But it may be months before we are in a more stable position and can focus fully on the activities in this plan.”

A further update to the business plan may also be published “if necessary” due to the quickly changing circumstances.

Aegon pensions director, Steven Cameron, added: “Rightly, the FCA has changed its immediate priorities and plans for the coming year to rise to the challenges posed by the coronavirus crisis.

"We support its short-term focus on protecting the vulnerable, tackling scams, ensuring fair customer treatment, keeping markets working well and mitigating the impact on consumers where firms fail."

However, Cameron also highlighted the 1.6 per cent increase in regulatory fees for some adviser firms outlined in the business plan, describing this as “unfortunate” considering the “key role” advisers often play in protecting consumers.

This also follows the news that the regulator was considering deferring investment pathways, intended to help consumers going into drawdown without advice with their investment choices.

Cameron added that the business plan made it “increasingly likely” that these pathways would now slot into medium-term priorities.

He explained: “[This] makes sense as in the shorter term, with the coronavirus making markets particularly volatile, attempting to point customers to a particular investment strategy without advice is fraught with difficulties.”

The consultation will close on 19 May 2020.

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