RegulationNov 14 2014

FCA: Pension freedoms increase need for consumer protection

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Proposed changes to the pensions regime to offer freedom of access to retirees and which are due to come into effect in April are a key reason why the need for consumer protection is increasing rather than diminishing, John Griffith-Jones has said.

Speaking at the Cass Business School, the Financial Conduct Authority chairman laid out a “sequential four-point plan” for regulation, saying one its primary, “non-negotiable” objectives remains “market integrity” and protecting consumers against “egregious behaviour”.

Referring indirectly to the incoming retirement reforms, he highlighted the “complexity” of longer term decisions and “asymmetry of knowledge between producer and customer” as evidence of the need for effective conduct regulation.

Mr Griffith-Jones said: “The need for consumer protection has if anything increased rather than diminished, particularly with the proposed changes to the pensions regime.

“The inevitable complexity of some long-term financial decisions, the asymmetry of knowledge between producer and consumer, and the unfortunate history of products coming to market designed to benefit the industry rather than the public, demonstrate beyond all reasonable doubt the continuing need for an effective conduct regulator.”

Risks associated with the new regime have been highlighted by a number of experts in particular relation to the wider application of hitherto higher-risk products such as drawdown at the cost of guaranteed income alternatives.

Giving evidence during a Pensions Bill committee session earlier this week, FCA director of policy David Geale was asked a number of times about the likely need for major redress in the future as a result of guidance not being taken or mainstream customers entering drawdown.

Elsewhere, the spectre of poor behaviour in financial services resurfaced as a range of record fines totalling £1.1bn were handed to banking groups over manipulation of foreign exchange benchmarks, as part of cooordinated action with global regulators.

In spite of citing the need for conduct regulation, however, Mr Griffiths-Jones did question how many rules are needed, stating an instinctive belief that less is more and that what starts as an attempt to provide clarity frequently ends up creating complexity.

The comments were part of an address setting out a four-point plan for regulation, taking in ‘structure’, ‘clarity’, ‘effectiveness’, and ‘continuous improvement’.

On clarity, Mr Griffith-Jones admitted an early assumption that the FCA’s conduct requirements were generally understood by the industry and consumers, if not always accepted as being the right ones.

He continued: “I quickly learned that it was not so straightforward, and in particular there was much talk of the moving of goal posts, expectation gaps and retrospective regulatory activity.

“Much of this was, with hindsight, sophisticated lobbying, but some reasonably founded in fact. Either way, it brought home to me the importance of a clear regulatory expectation, in ensuring that markets work well.”

On effectiveness of regulation, Mr Griffith-Jones said the City watchdog has learned the hard way that regulation by waiting for things to go wrong and only then attempting to clear up the mess is both low ‘value added’ and very unsatisfactory to the general public.

He cited the example of interest only mortgages, where the ‘early’ intervention was to draw the issue to everyone’s attention and to highlight the need for a repayment plan.

Mr Griffith-Jones added that pending culture change, firms may need more rules and controls rather than less in order to ensure good behaviour at the customer interface.

“So we are now in that ‘exposed’ period where the words and the actions are not always in sync. Given the lack of trust that remains there is always the danger that the demand for ‘something more to be done’ becomes unstoppable just as the need for it begins to diminish.”

peter.walker@ft.com

Additional reporting by Ashley Wassall