My Lords, I had a lengthy and impassioned speech prepared on the need for a second line of defence to address the risks that pension savers might make detrimental and irreversible choices when they access their savings. However, this has been tempered by the letter from the FCA, so my contribution is shorter and less passionate as a consequence.
This amendment sets out a duty on the Financial Conduct Authority to protect savers accessing their pension savings when they are engaging with providers during the decision-making and purchasing process. This is distinct from the duty on the FCA to protect savers receiving guidance from designated guidance providers.
The guidance guarantee, now referred to as Pension Wise, is a key measure for helping people navigate the complex retirement options arena from April 2015. There are people working hard to make its delivery a success, as it will provide a very important service to savers. The FCA will expect providers to check whether a customer has used the guidance service and, if not, to encourage them to do so. In popular parlance, this is the first line of defence.
Beyond the guidance stage, the saver has to move to the process of making a decision, and of selecting or purchasing a retirement income route. It is what happens at this stage—the exchange between the consumer and the provider—that is causing so much anxiety and to which the amendment is directed. It puts a duty on the FCA to secure an appropriate degree of protection for the consumer at that stage. This is what is popularly referred to as the second line of defence.
As my noble friend has said, we have now received the letter from Mr Woolard, Director, Strategy and Competition at the FCA, advising that FCA board approval is being sought for this second line of defence. It is minded to bring these rules into force on 6 April 2015, pending a review of all the current regulatory requirements around the customer’s interaction with the providers. The CEO and chair of the FCA have made some thoughtful and welcome speeches that have set the framework for debate in addressing the challenge of poorly functioning financial services markets.
The recent FCA reports on retirement income markets have been hard-hitting and on the nail. It is worth reminding ourselves what they observed: annuity sales practices were contributing to consumers missing out on a potentially higher income; consumers’ tendency to buy from their existing provider lowered the potential for higher income; consumers will be poorly placed to drive effective competition; the retirement income market is not working well; and the introduction of greater choice and potentially more complex products will reduce consumer confidence and weaken the competitive pressures on providers to offer good value. The anxiety was that that analysis and the heightened risk of consumer detriment with the advent of the new freedoms
would not translate into sufficient regulatory protection. Against that background, the FCA letter is most appreciated, although I await with interest the answers to my noble friend Lord Bradley’s three questions.
The second line of defence is not a total solution to the risk that consumers will make decisions that are not in their interest, but it will make a very important contribution to what we know is a poorly performing market. I therefore welcome the FCA letter and thank the Minister for facilitating its publication.