Is that your final answer? – FCA introduces "second line of defence" ahead of pension freedoms

28 January 2015. Published by George Smith, Partner

In a 'Dear CEO' letter to pension providers published on Monday the FCA set out new protections that will constitute a "second line of defence" for customers seeking to access their pensions.

Subject to approval by the FCA's board, the new "Additional Protections" will come into force alongside the pension freedom reforms on 6 April this year.

The new protections will require firms contacted by customers seeking to access their pension to ask customers questions about key aspects of their circumstances such as their health and lifestyle choices and marital status. Firms will also have to deliver appropriate risk warnings and to highlight to customers that using the new free pensions advice service Pension Wise (or alternatively taking regulated advice) is a key part of protecting themselves and their family when making an important and potentially irreversible decision. These messages will need to be delivered in direct and simple language. It remains to be seen whether these requirements will risk blurring the lines in relation to the making of personal recommendations, something that the FCA recently considered as referred to in Robbie's blog last Friday.

This second line of protection complements the 'near final' rules and guidance published by the FCA last year in relation to pension freedoms, which already included a requirement for firms to remind customers of the availability of Pension Wise and how to access it, as well as a requirement to describe the tax implications when a customer plans to take cash from their pension pot.

The FCA is clearly concerned with the increased potential for pension savers to be exploited following the reforms and has previously indicated, for example in Policy statement PS14/17, its intention to be alert to scams in the new pensions and retirement income market. We have mentioned schemes set up to exploit pension holders in several previous blogs, and realistically such schemes are only likely to become more common following the introduction of the pension freedom reforms.

In a press-release on Monday Phoenix Group published research suggesting that since the announcement of the pension freedom reforms there has been a three-fold increase in instances of pension savers receiving unsolicited offers to review or release their pension savings. It is perhaps an indication of the FCA's level of concern over the potential exploitation of pension holders, as well as the additional risk of pension holders simply making poor decisions in relation to their pensions following the reforms, that the FCA has introduced this second line of defence, and that it has done so on a provisional basis from 6 April without consultation, so as to avoid delay in putting these protections in place.

Ultimately, however, despite the additional protections being put in place by the FCA, customers will not be obliged to use Pension Wise or to take regulated advice and will still be able to proceed on an execution-only basis in making decisions in relation to their pension pots. The FCA will have to remain vigilant against schemes set up to exploit pension savers, and to keep the regulatory regime under review to ensure that it is delivering appropriate protections to customers. The FCA is intending to undertake a review of all of the current regulatory requirements surrounding customers' interactions with pension providers in the run up to their retirement in the first half of this year, incorporating and building upon the ABI Code, so we will wait and see what, if any, further steps the FCA decides to take to protect consumers.

While the FCA's new requirements do not apply to trust-based DC schemes, we understand that the Department of Work and Pensions is working with the Pensions Regulator to bring in equivalent rules in relation to such schemes in time for 6 April.

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