High-risk investment products, unsuitable pension transfers, scams and inadequate retirement savings are just some of the areas of concern highlighted by the UK’s financial regulator.
The Financial Conduct Authority’s wide-ranging Sector Views 2020 report looks at which aspects of financial services are potentially harming consumers or undermining trust in the industry. The review analyses seven sectors regulated by the FCA, including pensions, retail banking and investment management.
Smaller regulated firms and unregulated business are causing the most damage to consumers, says Christopher Woolard, executive director of strategy and competition, who has taken over from Andrew Bailey at the FCA on an interim basis.
One of the regulator’s biggest worries is that many people are entering retirement without sufficient income. Apart from not saving enough and failing to adjust from the move away from final salary (or defined benefit) schemes, retirees are prey to unsuitable advice, expensive products and scams.
Two figures in particular highlight the challenges of the pensions industry in getting people to save enough for their later life:
- 15.1 million people who are not retired are not saving into a pension.
- The vast majority of those who are saving into a pension still have a more than 60% chance of a significant fall in living standards when they retire.
The Pensions and Lifetime Savings Association says current minimum pension contribution levels (5% from an employer and 3% from an employee) are inadequate for a decent retirement.
When a person approaches retirement, the risks multiply, according to the FCA. Unsuitable advice to transfer out of defined benefit to defined contribution schemes could see consumers lose £20 billion in income guarantees over a five-year period. So-called “DB to DC transfers” have been a boom area of the advice market in recent years, not least because pensioners are being offered large sums (known as transfer values) to give up their guaranteed incomes. Former pensions minister Steve Webb says the default response for many pensioners should be to stay put.
The FCA also estimates that, on top of this £20 billion, retirees could lose a similar amount over five years by embarking on unsuitable investment strategies. Some 15 million people could be at risk of buying poor value products when they retire.
While scams remain an issue in the sector – up to 22 years of savings can be lost in just one day – the FCA notes that scammers are moving away from pensions and into retail investments.
Beware Unregulated Products
The FCA is concerned that investors are still exposed to high-risk or fraudulent products that have been marketed with very high interest rates such as mini-bonds. The regulator stepped in last November to stop the sale of mini-bonds to retail investors, more than six months after London Capital & Finance went under.
“Some of the highest risk products are offered by companies that are not regulated at all, while others are sold by firms that are only regulated for other activities,” the FCA says. It points out that many consumers are misled by advertising into thinking these products are regulated.
Apart from scams, the FCA warns that some investors are still buying products that are too high risk – and the investment industry shares some responsibility in the way these products are distributed and marketed. The FCA argues that ordinary investors are not being well served by the financial advice market in choosing suitable investment products. “One-off” advice is hard to come by, the FCA argues, and this would help investors avoid buying unsuitable or fraudulent products.
Investing Too Costly
Elsewhere in the report the regulator argues that investors and savers are still paying too high a price for investment products. Investment platforms (also known as fund supermarkets) are beneficial to consumers overall as they provide access, control and convenience. But it also points out that the barriers to switching platforms remain too high and awareness of charges too low.
The Financial Conduct Authority also highlights the risks associated with performance fees, which may encourage money managers to take unnecessary risks to meet bonus targets. It warns that smaller firms are more vulnerable to this risk than the largest businesses: “Systems and controls to manage the risk of market abuse at smaller asset management firms may also not always be as effective as at larger firms.” Asset managers are currently working on “value assessments” as required by the FCA, where they must demonstrate how they are adding value to investors.