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What are Regulators for?

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Ian Neale looks at the recent joining of regulatory forces and asks; what has this achieved?

An industry perception of the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) as police playing whack-a-mole, not very successfully either, is not improved by the frequent sight of stable doors being closed after horses have bolted. 

As these two regulators have just published a joint strategy for regulating the pensions and retirement income sector, it's timely to ask whether this is worthwhile, on balance; and indeed whether there is any point at all in having a regulator?

How did we get into this mess? Before the Big Bang on 6 April 1988, when the Financial Services Act 1986 came into force, the pensions industry (and many other industries) operated quite well without regulators. 

Then investor protection suddenly became important, so LAUTRO and FIMBRA were set up as self-regulatory organisations (SROs) for the life assurance and financial intermediary sectors respectively. Alongside several other SROs, they were required to create, monitor and enforce rules for their members. 

That didn't work, so they were replaced by one body, the Personal Investment Association. Further regulatory failures convinced the government that self-regulation lacked credibility, so in 1997 we got the Financial Services Authority (FSA) instead.

Besides consumer protection, the FSA was now also charged with maintaining market confidence, promoting public awareness, and reducing financial crime. It expanded accordingly, in size and cost, without ever being seen as a success. The 2008 banking crisis triggered another reconstruction in 2012, with banks and insurers coming under the supervision of the Prudential Regulatory Authority and the FSA re-named the Financial Conduct Authority (FCA) to supervise other financial service providers.

During this period, the 1991 Maxwell scandal convinced the government that occupational pension schemes, hitherto unregulated, were at risk of being plundered by their sponsoring employers; and so we got the 1995 Pensions Act and the occupational pensions regulatory authority (opra). Almost inevitably, that didn't work well either, and in 2005 opra was replaced by The Pensions Regulator (TPR). Just like the FCA, it has since put on a lot of weight.

So the last thirty years have hardly been a golden age. Neologisms like 'mis-selling' have entered the lexicon, while keywords like 'compliance' have become a ubiquitous presence in communications. Little or no regard has been paid by regulators and their political masters to the cost of the compliance burden, or whether it is even sustainable.

The arrival of automatic enrolment in 2012 brought the concept of a 'workplace pension', which bridges the FCA and TPR: it can be, for example, a Group Personal Pension (FCA territory) or a Master Trust (TPR's regime). Not surprisingly then, six years later it has occurred to the regulators that there might be merit in working together; hence the new strategy.

The four stated 'regulatory objectives' of the joint strategy are

A - Pension and retirement income products support people to increase financial provision for later life.

B - Pensions are well-funded and invested appropriately.

C - Pensions are well-governed, well-run and deliver value for money.

D - People access helpful information, guidance and advice that enables them to make well-informed decisions.

Since I dare say these objectives would be supported by 99% of us who work in the pensions industry, why do we need regulators? 
You might argue 'to set standards'; but plenty of voluntary industry initiatives such as the Pensions Administration Standards Association (PASA) exist to deny that necessity. We don't need a regulator to publish Codes of Practice.

A principal purpose of regulators has always been consumer protection, based on an asymmetry of information between providers (and advisers) on the one hand, and 'consumers' on the other. It's in a regulator's DNA to assume that providers will always seek to take advantage of consumers, unless heavily restrained and controlled by rules, regulations and red tape.

By definition, however, it is impossible to armour-plate everyone; and there is a strong argument that the world has moved on, more than a little, since 1988 - notably with the creation of the world-wide web. The asymmetry is, or can be, much less. What's in short supply is trust, which was severely damaged in the 'wild west' days of the early 90s, and confidence in a future.

It is a truism that there will always be malefactors, and money stimulates greed, so enforcement activity has steadily risen in the regulatory profile. As with much law however, evidence of deterrence is thin. Fines and bans are post-facto punishments for those who have succeeded, typically, in stealing huge sums; very rarely it seems are compensation orders met. Meanwhile the 99% - the 'good guys' in the pensions industry - are forced to pay burdensome and ever-increasing levies to fund the regulators: for little or no perceived benefit.

What is undeniable is the need for greater public awareness of pensions, long-term saving, and the requirements for later life; together with demystification and use of Plain English. We don't need regulators to promote this (though since we're stuck with them for the time being, they could do a lot to help). However, we do need a paradigm shift: a fundamental change in the language, assumptions and culture in which we operate.

Ian Neale, Director, Aries Insight
Any views or opinions presented are solely those of the author and do not necessarily represent those of either Aries Pension & Insurance Systems Ltd or Aries Training & Information Systems Ltd