Who will protect us from slow-footed regulators?

Back then, millions were badly advised by commission-hungry salesmen to opt out of workplace pension plans in favour of taking out personal pensions.  

This is another sorry chapter in the sad tale of scandals to blight the UK financial services sector. It is not only a market failure but regulatory failure

This scandal cost the industry more than £13bn in compensation and left deep scars on its reputation.  

Insurers, financial advisers and, most importantly, regulators, should have learned lessons. 

But three decades on we are once again staring into the face of yet another significant pension mis-selling mess.

Last month the Financial Conduct Authority said too many people had been badly advised to give up traditional defined benefit pensions since 2015.  

This is when radical reforms made it more appealing for members of 'gold standard' DB schemes to transfer their benefits to less secure but more flexible pension arrangements, a move the regulator does not regard to be in the best interests of most.

A safeguard introduced at the time required those considering transferring a DB fund worth more than £30,000 to obtain professional advice. But the quality of much transfer advice has been found to be so poor the city watchdog wants major changes to the advice market.

Tens of thousands of individuals are now thought to have been wrongly advised to give up their valuable DB pensions and, in doing so, depriving themselves – and a surviving spouse – of a secure, inflation-proofed income in retirement. While the current mis-selling scandal will not be of the same scale as the one three decades ago, it is expected to cost the industry around £2bn a year in compensation. 

Watchdog should have acted sooner

The same drivers are at the heart of this current scandal: conflicts of interest in the way advisers are remunerated and a slow-footed regulator.

Most pension transfer advisers in the UK use a fee model whereby they do not get paid if their client does not act on their advice to transfer. The FCA has for years acknowledged that this 'contingent charging' model is riskier for consumers due to the incentives for advisers to recommend actions that generate fees for them.

But contingent charging was allowed to continue, in spite of calls for it to be banned, largely due to lobbying from the advice industry and others who benefit from transfer business.

While fending off calls to scrap contingent charging, the FCA was also aware that contingent fees were a rip off for some consumers. In evidence published last month, the FCA said consumers can pay up to four times more for advice under the contingent fee model than had they paid upfront. It is scandalous that this was not tackled sooner.

The FCA’s market review found adviser conflicts of interest were driving other harms, such as customers being signed up for steep ongoing advice fees and product charges after transferring. 

The FCA now proposes to ban contingent charging in all but exceptional cases, and put in place other measures to protect those looking to transfer. But all this should have come much sooner.

All the elements were in place in 2015 for another repeat of a mis-selling scandal: huge cash transfer values were on offer; scheme members were under pressure to make complex decisions; and contingent fees presented too much temptation for advisers to put their own interests ahead of their clients. Huge red flags were waving all over the market and this should have been regulator’s signal to act.

Encourage advice checks

This is another sorry chapter in the sad tale of scandals to blight the UK financial services sector. It is not only a market failure but regulatory failure. 

In the first instance, the regulator needs to do the right thing and launch a widespread review where all who have transferred since 2015 are encouraged to have their advice independently checked. More than 160,000 transfers have taken place over this time.

Second, advisers who wilfully misled clients –  such as portraying their ongoing advice proposition as mandatory – should be stripped of their authorisation.

Finally, the Work and Pensions Committee needs to drill to the heart of why the regulator was not more proactive. The select committee urged the FCA 18 months ago to impose an immediate ban on contingent charging, warning a mis-selling scandal was erupting.

Many in the industry supported this ban and urged the regulator to intervene much sooner. They are victims of this financial scandal as much as the consumers who were mis-sold.