Pension Freedom  

FCA 'not convinced' on drawdown charge cap

FCA 'not convinced' on drawdown charge cap

The Financial Conduct Authority is "not convinced" capping charges for drawdown products is the right thing to do, despite the recommendations of a committee of MPs.

During a conference in Gleneagles this weekend (15 September), the FCA's chief executive Andrew Bailey said he did not believe capping charges - as has happened with automatic enrolment schemes - would work with drawdown products but he said it remained an option.

Auto-enrolment schemes are currently subject to a charge cap of 0.75 per cent and the work and pensions select committee has called for the introduction of default drawdown pathways with similarly capped fees in response to the introduction of pension freedoms.

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But Mr Bailey said: "At this stage we are not convinced, though the option is not closed off, and would never be so. But in a market where we want to see evolution and innovation it is hard to know the right price, and there could be negative effects on innovation and competition.

"As a point of reference, the fee level of 0.75 per cent on default arrangements in accumulation would at the least prompt the question of why fees for some other products are higher for some consumers."

Mr Bailey said the FCA would look at charges as part of the review it carries out a year after the package of measures it has proposed following the Retirement Outcomes Review had come into effect.

Given a final report on these measures is not expected until the first quarter of 2019, this means the FCA will not look at this again until 2020 at the earliest.

But Mr Bailey said: "If we find problems with charges, then capping will be on the table as a response."

One of the proposals included in this package of measures is a rule requiring providers to offer their customers easy to access ready-made drawdown investment products, in a bid to prevent them from sticking their money into cash.

Mr Bailey also said allowing savers to access their retirement pots early was the right course of action but regulators need to be aware of the potential harmful consequences

He said: "The freedoms remain the right course to follow, but supplemented by an expansion in the scale and scope of auto-enrolment, so it isn’t a total free-for-all.

"My reason for taking this view is that while the contours of the lifetime model will always change, it is unlikely that we will turn the clock back in the foreseeable future, and greater freedom of choice over decumulation – when and by how much and in what form pensions are put into payment – makes a great deal of sense in terms of the shifts in and uncertainty around the lifetime model."

But he warned that savers needed to be aware of the consequences of using these freedoms.

Mr Bailey said: "We have transferred the responsibility for a very complex area of decision-making to individuals, and we need to do all we can to help people make those decisions. And that is where the FCA, among others, comes in."