The City watchdog’s failure to provide adequate supervision of firms could be to blame for the increase in scams linked to high-risk investment products, Pimfa has told MPs.
Appearing at a Work and Pensions Committee hearing on pension scams this morning (September 16), Tim Fassam, director of policy and government relations at Pimfa, said the current regulatory perimeter excluded too many high-risk products which was why the industry is seeing more scams.
Mr Fassam said: “We are seeing things that are technically in the scope of regulation, but that lead to bad consumer outcomes.
“We have seen this with Sipps, where people are being put into high risk, unregulated investments.
“This is leading to them falling onto the Financial Services Compensation Scheme (FSCS) or leaving consumers without compensation at all. We think this is partly caused by the FCA supervision focusing on larger firms and missing the smaller firms.”
Mr Fassam said although the growing trend of individuals being persuaded to invest in illiquid products was not strictly considered a scam, the committee needed to look into this as more pension savers were being targeted.
He said the committee’s inquiry must be broader and should be based around three areas: pension liberation fraud, investment fraud, and investments which sit outside the regulatory perimeter.
Mr Fassam said any solution for dealing with scams must take into account the challenges posed by the FSCS as well as focusing on the need for consumer protection.
He said: “It is our view that the FCA’s regulatory approach currently incentivises firms to deliberately transfer risk onto the FSCS and continue trading, while the practice of 'phoenixing' remains far too prevalent.
"These two issues, combined with the fact that the calculation of the levy is homogenous and takes no account of the risk any given firm poses to the FSCS, has led to an unsustainable situation of increasing unaffordability and decreasing trust across our profession.
“While it is welcome that the FCA has recently recognised issues with the construction of the levy, questions remain about the reasons it continues to rise.”
The FCA yesterday issued a call for input which seeks answers on how to tackle the cost of compensation.
It offered up three approaches: firms involved in ‘riskier’ advice should hold more capital to avoid defaults in the first place, the same firms should take out ‘more’ or ‘different’ professional indemnity insurance; or those riskier firms simply pay more towards the FSCS.
A letter sent by Financial Adviser as part of our Keep Fees Fair campaign to Stephen Timms, chairman of the WPC, last month outlined issues such as the sharp rise in professional indemnity premiums for advisers and the growing FSCS levy.
Responding to the letter, Mr Timms encouraged advisers to submit responses to its three-stage inquiry into pension freedoms, with the first phase looking at pension scams specifically.
Meanwhile, also appearing at today’s hearing, Margaret Snowdon, chairman at Pension Scams Industry Group, said she would like to see changes made to regulation and stressed the importance for regulators to move fast when it comes to pension scams.
She said: “I think it's important that regulators are flexible to the extent they can move fast because scams do change, and we're certainly a little bit concerned that we're often trying to regulate for last year's problem."
Andy Agathangelou, founder of the Transparency Task Force, said any regulatory framework needed to be built around the duty of care principle.
But he agreed change was needed to address gaps in the framework.
He said: “These pension crooks understand how to dance on inside and sit just outside the regulatory perimeter to avoid being caught.”
Look to overseas
The panel also suggested more needed to be done to stop scammers from operating overseas.
Ms Snowdon explained to the committee that there has been an increase in overseas activity where unscrupulous advisers have persuaded savers to invest in overseas schemes which are unregulated and high-risk.
It was proposed that the UK government and authorities should collaborate with overseas jurisdictions to put a stop to this.
Mr Agathangelou said: “We see a general lack of international collaboration by regulators and enforcement agencies to work together to create a defensive wall that is difficult to breach."
He added: “It is wrong to simply tie it down to [the] question of what we can do within [the] UK when scam victims are all over the world.”
The WPC inquiry on pension scams is expected to run until November.
amy.austin@ft.com
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