The Financial Conduct Authority (FCA) will introduce a charge cap for investment pathways if the market doesn’t regulate itself, it has warned.
Pritheeva Rasaratnam, head of pensions and funds policy at the regulator, told the Work and Pensions select committee today (February 6) it would be a challenge to impose a cap from day one but the regulator had not dismissed the idea.
She said: "This a market that doesn’t exist yet, and there is a real danger if you introduced a cap at the wrong level, there could be unintended consequences.
"We want to see how the market develops, where the charges are lying, and we will do a review one year after investment pathways come in, and we will be looking very carefully at charges at that stage.
"A cap isn’t out of the question at that stage."
Andrew Bailey, the FCA’s chief executive, also gave evidence to the committee's inquiry into contingent charging on defined benefit (DB) transfers, launched in January.
He said: "Our general approach towards capping is that it is a tool that it is in the box, but we use it when more market consistent tools aren’t working and a market is failing."
The watchdog published last week (January 28) a consultation paper on investment pathways, where it announced plans to help the estimated 100,000 customers that enter drawdown without taking advice each year.
This came after the FCA found in its Retirement Outcomes Review that many consumers were solely focused on taking tax-free cash from their pensions and were "insufficiently engaged" with the decision around how to invest the remaining funds that moved into drawdown.
In response, the regulator proposed pension providers offer non-advised customers a choice of four investment pathways to best meet their retirement objectives.
Those objectives included consumers who have no plans to touch their money in the next five years and those who plan to use their money to set up a guaranteed income, alongside those who plan to start taking income and those who want to take out all their money within the next five years.
Alistair Cunningham, financial planning director of Wingate Financial Planning, said there could be an argument to introduce a charge cap in this area.
He said: "I am generally against charge caps, but mainly where individuals are making an informed choice.
"In this case, there are clearly some firms who are taking advantage of the lack of engagement by some consumers to gouge usury costs from them.
"Coupled with inappropriate investment choices is that those accessing cash in this way are those that can least afford to be taken advantage of."