In February, the Department for Work and Pensions published an impact assessment of its proposed new rules to help tackle pensions scams.
The new rules centre around amending existing statutory rights that enable pension holders to transfer their pension pots to new schemes.
The idea is that trustees or scheme managers can ensure against transferring pensions to scam schemes, and the new rules will give them more power to decline requests if they suspect that the scheme in question is fraudulent.
The rules will also require the trustees to check that any receiving scheme is regulated by the Financial Conduct Authority, has an active employment link with the individual, or is an authorised master trust.
Key Points
- Rules have been published around pension scams.
- New legislation cannot come soon enough.
- Pension scammers often come in and target people with large pots.
The proposed rules apply to both defined contribution and defined benefit pension schemes, and cover transfers to qualifying recognised overseas pension schemes, which are overseas self-invested personal pensions.
How much will the rules cost?
The new rules to prevent scams are expected to cost the industry, and employers, around £1m in the first year.
This figure comprises £463,000 in familiarisation costs and £674,000 in administration costs (£435,000 to providers and £239,000 to employers).
According to the DWP, the proposed new regulations will affect 100,000 DB pensions transfers and 60,000 transfers from DC trusts.
The scale of the problem
The new legislation cannot come soon enough and we would welcome the new rules with open arms.
In fact, any legislation brought in to curb scammer activity can only be a positive step towards ending pensions fraud altogether.
Over the past decade, pensions fraud has reached unprecedented levels and has left thousands of Britons out of pocket in their retirement.
In 2017 alone, Action Fraud received reports from 253 people who had collectively lost £23m to pension scammers. This equates to an average loss of £91,000 per person.
And the FCA’s Financial Lives report suggested that 107,000 people aged between 55 and 64 could potentially have been victims of pension scams in the same year.
Pensions scammers often swoop in and target older people who have built up large amounts of money over the years, convincing them to move secure pension pots into fraudulent or extremely risky schemes.
This leaves hard-working people with little or no chance to rebuild their pensions pots, causing them untold stress and financial hardship in their twilight years.
Although the new rules may cost the industry £1m (collectively) in the first year, this is a drop in the ocean compared to the amount of money being taken from hard-working people by unscrupulous advisers and fraudsters.
More due diligence required
The proposed new rules mean that more due diligence will be required from the pensions scheme managers or trustees, meaning that there should be a strong safeguard or backstop in place to prevent transfers to fraudulent schemes.
The new rules will also put the responsibility firmly in the hands of the experts, and not the pension holder.
Increased due diligence is something that has been in the spotlight following the Berkeley Burke case – which set an industry standard in 2019 when the pensions company finally dropped its appeal against the Financial Ombudsman Service.
Berkeley Burke had been under fire for failing to provide adequate levels of due diligence for a client’s investment, which later turned out to be fraudulent.
Berkeley Burke argued that, although it had invested a client’s money into a scheme that ultimately turned out to be fraudulent, it had applied adequate levels of due diligence at the time.
It did appeal against the Fos ruling, but dropped the case due to insufficient funds, meaning that the ruling stood, setting an industry-wide precedent.
The new legislation fits into this picture, as it centres very much around due diligence.
Considering the reputation of Britain’s financial landscape, anything that the industry can do to ensure the financial security of their clients, and restore faith in what should be a transparent and trustworthy sector, is positive news.
More education needed?
Although the new rules will place the responsibility firmly in the hands of the financial experts when dealing with pensions transfers, we do still think that a rounded approach is best to combat pensions fraud and stop the scammers.
It has been a year since the cold-calling ban was introduced, and although this has helped to prevent a plethora of calls from British companies to pension holders, scammers do not usually listen to rules, and many people are still targeted by fraudsters who are hoping that they will not be aware of the ban.
Additionally, the cold-calling ban only applies to British companies, not those overseas who are pushing schemes to pension holders.
The education push by the government and the FCA needs to step up to ensure that all people, of all demographics, are aware of the tricks that scammers use to liberate people of their pension pots.
The FCA’s Scam Smart website is a great resource, but more outreach is required to reach those who do not rely on the internet or social media as much as others may do.
What else can be done?
While we welcome these proposed new rules, which boil down to increased due diligence for pensions transfers to Sipps or Qrops, there is more to be done.
Ending contingent charging would be a major step forward, in our opinion, although this is only one way to stop adviser bias when recommending pensions transfers.
Contingent charging is where financial advisers only get paid if a transfer proceeds, which – according to the FCA – creates a startling conflict of interest.
An FCA study found that 69 per cent of people were advised to transfer their money from secure, occupational DB schemes to riskier DC schemes, despite the fact that most consumers would have been better off staying with their original policy.
We firmly believe that any advice given needs to be in the consumer’s best interest, not because the adviser is being paid a commission to recommend switching to a certain provider or scheme.
The FCA consulted on the issue last year, and many believe that a ban may come into play within the first quarter of this year.
Employing much harsher penalties for scammers, and unscrupulous advisers and companies, would also be welcomed.
In summary, we would wholeheartedly welcome the new rules set out by the DWP, and we hope that this is finally the year where the industry wakes up to scammers and fraudulent activity, and works collectively to stop it for good.
Andrea Murray is a compliance solicitor at APJ
