Facing up to pension freedoms is the biggest challenge facing the Financial Services Compensation Scheme (FSCS) over the next decade, its outgoing chief executive has warned.
Speaking in a personal capacity at the UK Finance’s Retail Banking Summit today, 13 March, Mark Neale said that while we should be prepared for failures in the financial services retail market, the next the “real challenge” will be tackling the risks and opportunities created by pension freedoms.
The FSCS said it has paid out £581m in the five years since pension freedoms, compared to £80m in the four years before it took effect.
“We can also extend protection to consumers by promoting the wider use of so-called default options which cut in when consumers find choices bewildering and hard to take,” he said.
“But such default options are much hard to find when it comes to investing retirement funds to generate an income in retirement. And yet, following pensions freedom, this is now the area where consumers confront both choice and risk.”
He added that Nest had been a “notable pioneer” of default options.
Neale, who will step down in May, added that over 60 per cent of the £3.3bn paid out in compensation during his nine-year tenure was a result of mis-selling or bad advice.
“FSCS’s compensation payments are an index of a market in trouble, which is highlight by the fact that claims and payouts are rising. It is sobering that a substantial portion are as a result of mis-selling or bad advice,” he continued.
“It results from a market characterised by a bewildering array of products, by complexity – some deliberate – and by profound information asymmetry.”
Delivering his future vision of what the FSCS should look like, he said that the lifeboat should focus more on delivering higher protection limits for consumers, but over a smaller range of products.
Currently, consumers are only protected up to £85,000.
Ensuring that consumers have more interest in and a better understanding of financial products is also key, but the industry needs to be “much smarter” about how it engaged consumers, he argued.
“Indeed, research published by FSCS last year showed that people would save more for retirement and would invest in different retirement products if they had a better understanding of FSCS protection,” he said.
The FSCS said it is undertaking a number of initiatives to raise awareness of its role in protecting consumers retirement savings.
“Consumers more generally will need better information about FSCS protection when thinking about the investment of their retirement savings. They will need that advice at relevant times, but especially when making decisions about their retirement pots.
“And when things do go wrong, consumers will need to know that they can seek FSCS’ help without cost,” Neale concluded.
Recent Stories