Pensions Freedoms and the Second Line of Defence – some flesh on the bone

In late January the FCA issued a Dear CEO letter to pension providers, proposing new protections to be provided to consumers seeking to access their pension pot when the new pension freedoms are introduced from 6 April 2015.

The FCA has now published a new set of rules setting out the obligations on pension providers and others to ask questions and provide appropriate risk warnings to consumers seeking to access their pension pots from 6 April.

The new rules have been brought in under section 137L of FSMA which permits the FCA to introduce new rules without consultation where it appears to the FCA to be necessary or expedient for the purpose of advancing its consumer protection objective. The FCA says that it is satisfied that that test is met as consumers are exposed to "a much greater risk of poor financial outcomes from one-off decisions in not fully understanding the consequences of accessing their pension savings". A clear indicator of the FCA's fears post 6 April.

The new rules apply to pension providers (including SIPP operators), trustees of contract based defined contribution pension schemes and employer sponsors. Trustees of trust based defined contribution pension schemes will be subject to separate complementary guidance to be introduced by The Pensions Regulator. The rules are to form part of COBS 19.

Pension providers and others are already required from 6 April to signpost consumers to the government's "Pension Wise" service to be provided by the Citizens Advice Bureau and The Pension Advisory Service. However, irrespective of whether or not a consumer has received guidance from Pension Wise or regulated advice, retirement risk warnings must be given. This is subject to two exceptions (1) an adviser who has provided the regulated advice approaches the firm or (2) the firm has already provided retirement risk warnings and believes those risk warnings to still be appropriate. When deciding whether previous warnings are still "appropriate" a firm should consider the passage of time since the previous risk warning, any change in the consumer's circumstances, a change in product features and/or changes in the market.

The trigger for providing retirement risk warnings is a consumer either verbally or in writing saying that they want to access their pension pot.   Firms are then obliged to ask relevant questions based on how the consumer intends to access their pension pot and then to highlight any risk factors. Firms are required to prepare questions to be raised with consumers ahead of 6 April. Further, new COBS 19.7.12 sets out guidance on risk factors which are to be highlighted by firms including a consumer's state of health, loss of any guarantees, inflation and whether the consumer has a partner or dependents. Firms must keep a record of whether a consumer has received retirement risk warnings, regulated advice or advice from Pension Wise.

Although the FCA's new rules are helpful for those affected by the new requirement to provide retirement risk warnings, it is not helpful that an increasing amount of regulation is being introduced quickly and without consultation ahead of 6 April. However, at the same time, the FCA is facing the difficulty that it does not know how many people are going to seek to cash in their pension pots (one estimate puts the total withdrawal from pension pots as high as £6 billion) and/or what new products are going to enter the market come 6 April and with those new products, what new risks consumers might be exposed to. What the new rules appear to seek to achieve is to shift at least in part the obligation identify and highlight risks with new products on to firms who have to provide retirement risks warnings. The FCA plans to consult again in summer 2015 on whether to retain, modify or supplement these new rules.