PIMFA, the trade association for the UK wealth management and financial advice industry, has today given evidence to the House of Commons' Work and Pension Select Committee inquiry into pension freedoms and scams.
As part of PIMFA's evidence to the Committee, Tim Fassam, director of policy and government relations at PIMFA, addressed the twin problems of the failure of the Financial Conduct Authority (FCA) to provide adequate supervision of firms, as outlined in the most recent PIMFA whitepaper, and the ever increasing financial burden place on advisers by the Financial Services Compensation Scheme (FSCS) levy. Both of which result in poor outcomes for consumers.
Fassam said: "While the focus of this part of the inquiry looks specifically at the prevalence of pension and investment scams arising as a direct result of pension freedoms, it is also important to bring to the attention of the Committee the propensity for individuals to invest in products which whilst not strictly scams, pose significant potential for consumer detriment."
It is our view that the FCA's regulatory approach currently incentivises firms to deliberately transfer risk onto the FSCS."
These are products which fall outside of the regulatory regime, which are largely unsuitable for retail consumers but sold to them regardless, and legally, he added. While, in the event of these products failing, consumers will have the ability to claim compensation through the Financial Services Compensation Scheme (FSCS), PIMFA take the view that it would be a better outcome if these products were not available to individuals in the first place.
Fassam said: "Every customer who finds themselves in need of the FSCS has had a poor outcome and an incredibly stressful experience; it is best for all if this can be avoided".
He went on to add that any solution to the current situation must also take account of the challenges posed by the FSCS, whilst balancing the obvious and ongoing need for consumer protection, saying: "It has been PIMFA's view for some considerable time that the standard of supervision carried out in this sector is inadequate and has led to significant market distortion. Unless this is addressed, compensation costs will continue to rise, as will levy payments to the FSCS by our members.
"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."
"PIMFA is working constructively with the relevant stakeholders to address this. We are pleased to see the FCA recognise only yesterday that ever increasing, and unpredictable FSCS costs are unacceptable. We also welcome the regulator's commitment to working with all of industry to reduce the ongoing financial and reputational cost over the long term."