Regulation post Covid: Part 1 (33): 13/10 - FCA strategy for dealing with pension mis-selling

Starting on 16 March last year, I began writing daily blogs about the impact of the Covid crisis on financial regulation.?Although Covid is still with us in many ways and its practical impact on regulation remains strong, regulators are starting to move on and the regulatory agenda, though scarred by the pandemic, is moving into new territory.

The FCA's pension mis-selling problem appears to be getting deeper, and its current strategy, of advising consumers to lodge compensation claims with the FSCS or the liquidator of their failed IFA, seems to be misfiring.

Back in May, when the FCA was given a hard time by the TSC, I pointed out that the original failings went back to 2014/15, when (at the behest of HMT) the pension freedoms' policy/regulations were written at speed and without taking proper account of the evident risks. That said, the current strategy of putting the onus on consumers and part-outsourcing the execution to the FSCS and FOS always looked optimistic and is heavily dependent on the accuracy of the FCA's sampling.

Encouraging consumers to complain as a means of seeking compensation for large scale mis-selling also has an unhappy history. Both PPI and, perhaps more relevantly, the mortgage endowments mis-sold in the 1990s proved to be much larger and longer run exercises than envisaged, and pensions looks to have similar characteristics. There are, however, at least three important differences, only the first of which helps the regulator. (1) Fewer consumers are affected and the problem only goes back to 2015; but (2) Pensions are arguably consumers' most important financial product, even more than mortgages; and (3) the problem originated under the FCA and grew on its watch; the other two pre-dated the regulator's formation (although the PPI problem continued to grow under the FSA).

An alternative approach, involving the FCA owning the problem directly and establishing a separate division to manage the compensation process, was used to deal with a previous generation of pension mis-selling when the FSA was first formed in 1998. However, it's far from a panacea or an easy option - the division existed for fully seven years and the shift to a complaint-led approach for mortgage endowments was largely a reaction to its perceived shortcomings - and might not sit well alongside the Transformation programme. Whatever the FCA does, this is a problem that looks unlikely to be resolved any time soon.

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