Financial Conduct Authority director of policy David Geale told MPs the qualification standards and remuneration reforms at the heart of the Retail Distribution Review will reduce the potential for poor outcomes, as he faced a barrage of questions over pension freedoms ‘mis-selling’.
Giving evidence during a Pensions Bill committee session yesterday (11 November), Mr Geale (pictured) 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 clients taking advice, but ending up in higher risk products such as drawdown.
Asked by Nic Dakin, Labour MP for Scunthorpe, whether financial advisers in particular had sufficient “indemnity arrangements” to protect against future claims, Mr Geale responded that reforms would prevent the need for widespread compensation.
He said: “In an event where redress is payable for some form of mis-selling, a combination of the capital that we require advisers to hold, the professional indemnity insurance that we require them to hold, and the Financial Services Compensation Scheme if the firm is no longer around, is there to pay that redress.
“It is also important to look at some of the work we have done, for example through the [RDR], where we sought to remove some of the incentives for advisers to sell the wrong type of product; we have also raised the qualification bar.
“What we should see in future is better qualified advisers, incentivised in the right way to help their customer, so over time I would expect to see the incidence of mis-selling reducing.”
Mr Geale also sought to dismiss concerns over suitability with income drawdown, saying under current arrangements the regulator believes those with £50,000 or more are suitable for existing products in the market and that innovation would likely move this bar lower.
“There is no reason why over time flexible access products need to be poor value for money or to represent a high element of risk: it is about people understanding what they are getting into.”
The comments come in the wake of concerns raised by Personal Finance Society chief Keith Richards, who said during a pensions panel that he was uncomfortable with people promoting advice on the basis that it offers recourse to the Financial Ombudsman Service.
Questions were similarly raised over the risks inherent in the proposals, with the panel of experts broadly admitting that ‘bad outcomes’ were inevitable, but that this was the nature of liberating the market in this way.
Elsewhere during the committee sessions, David Gauke, financial secretary to the Treasury, dismissed suggestions that the government should reduce the annual allowance to nil for anyone who has accessed their pension flexibly, to close a potential tax ‘loophole’.
In order to reduce the scope for ‘recycling’ tax-free allowance, the government has already said the annual allowance will fall from £40,000 to £10,000 when pensions are accessed under any of the new options.
However, this still means individuals can utilise salary sacrifice to pay in sums to their pension without paying any tax and then immediate access money tax free as a lump sum. Corporate Adviser editor John Greenwood estimated a potential cost of £2bn from the loophole.