The outgoing chief executive of the Financial Services Compensation Scheme has called for its compensation limit to be increased "significantly" to ensure no consumer risks losing a major part of their pension if mis-advised.
Mark Neale, who is due to the step down from his role at the FSCS in May after nine years at its helm, also suggested the lifeboat fund should adopt a more targeted approach to the pension products it protects.
Speaking in a personal capacity at UK Finance’s Retail Banking Summit today (March 13) Mr Neale said the FSCS should exclude a number of unregulated investments and retirement products which have led to an increasing number of pay-outs in recent years.
He said: "FSCS’s compensation payments are an index of a market in trouble, which is highlight by the fact that claims and payouts are rising.
"It is sobering that a substantial portion are as a result of mis-selling or bad advice and it results from a market characterised by a bewildering array of products, by complexity – some deliberate – and by profound information asymmetry."
Of the £3.3bn paid out in compensation during Mr Neale’s time at the FSCS, he said more than 60 per cent was as a result of mis-selling or bad advice and a "significant" proportion related to transfers from occupational schemes in order to invest in "risky and illiquid" assets usually held within a Sipp.
Mr Neale said the FSCS had paid out compensation worth £581m for these types of claims in the five years from 2014-15 to now.
This compared with just £80m in the four years before the pension freedoms took effect.
Mr Neale suggested the wide range of retirement products which are currently protected by the FSCS created difficulties for consumers and should be narrowed in the interest of guiding them towards "simple, good value" financial products.
In return he called for the level of protection to increase "significantly" to protect consumers’ pensions, and proposed regulated advisers should be barred from recommending products outside of this boundary to mainstream investors.
He said: "As a quid pro quo narrowing our protection, I would then significantly increase the level of our protection for retirement savings and advice on retirement savings so that no consumer is at risk of losing a major and irreplaceable part of their pensions.
"It surely cannot be right that some members of the British Steel Pension Scheme have lost tens of thousands of pounds as a result of mis-advice to transfer out."
Mr Neale said his concern was with the "great majority" of people who are not financial experts and find financial products daunting, with sophisticated investors more able to "look after themselves".
Mr Neale said it was "delusional" to think any regulator could police a fragmented market to "anticipate harm before it manifests itself", rather than to react when it does.
He said: "Consequently, I advocate prioritising protection of the consumer over maximising choice.