Both principle-based regulation and pension freedoms could have been handled better, says Lord Turner, and the regulator should also think hard about safe harbour for advice. John Greenwood hears why
Pension freedoms risk worse outcomes for many, principle-based regulation is too rigid and the regulator should consider offering advisers safe harbour. So says former Financial Services Authority chairman and architect of auto-enrolment Lord Turner.
In a frank interview with Corporate Adviser, Adair Turner, Baron Turner of Ecchinswell, raises serious concerns over Chancellor George Osborne’s pensions freedom policy, highlighting the many risks and challenges it creates for both members of the public and the financial services industry.
Giving millions of retirees with billions of pounds an unfettered range of choices for their nest eggs sounds like a regulator’s nightmare. So if pension freedom had come in when Turner was chairman of the FSA, what would his reaction have been?
“I understood politically why the pension freedoms were done,” he says. “But I think they were an unnecessarily radical step. I am concerned that, with just complete freedom, you will have people who would have been well advised to do something different but who, in their 80s, are going to be on state pension.
“By definition, if people take money out suddenly you will get different cohorts depending on how lucky they are and whether the market goes up or down,” he says. “I think we will end up with lots of people at the lower end getting neither nudges nor advice.”
So does that mean more sub-optimal outcomes for those people who would have done something different if the reforms had not taken place? “Yes, I think it does. And there could have been a better thing, encouraging people not to take an annuity at age 65. Because trying to write annuity contracts at 65 to cover lives of 23 or 24 years with a tail of people who might live for 35 years requires so much capital, because there is so much risk in there, and in an era of low interest rates. Almost nobody should have been buying an annuity that early.”
Instead he would have liked to see a nudge into some form of drawdown/annuity hybrid product. “A drawdown product so that up to a certain age your inheritors get something, but with a rollover of a proportion of it into an annuity at some later age – that would have made sense,” says Turner.
So does he think the industry is stepping up to the plate to meet the challenge it has been presented with?
“There are risks and the industry is legitimately cautious of what it is being asked to do,” says Turner. “And I think we are in a pretty unclear space now because, when the freedoms were announced, there was a set of generalised statements that there would be all sorts of advice but it is still not clear who provides this advice. You have got to have an adequate payment for advice and a post facto responsibility for that advice, but the market doesn’t support that. It is still unclear to me who is meant to provide the advice that is the corollary of the pension freedom. And I think essentially we are going into an environment where there will be pension freedom but not much advice. There just isn’t a workable market there.”
Concerns grew over a problematic annuity rollover process while Turner was at the helm of the FSA. So does he think we are creating an even more complex landscape and the potential for even more consumer detriment?
“It is an immensely complex thing for people. We have gone from a default process – and this illustrates that people find choices very difficult. There are all sorts of choices people logically should have taken. Take the roll-up of the state pension: delay it and get a higher amount. It has become less generous but at one point it was a no-brainer. Yet very few people took it.”
Turner is remarkably frank about what he sees as the flaws in the principles-based regulation structure of both the FSA that he oversaw and today’s FCA. He speaks with regret about not having done more to give the industry a steer on what practices were acceptable.
“The FSA-inherited culture was very, very resistant to that. It was ‘No, no, we have these absolute principles of working out what is good advice and they should apply in all circumstances.’
“I think we could be better at trying to create levels of guidance that help the industry to say: ‘If you follow these procedures in this fashion, we are going to count that as good selling.’ It is so costly to analyse someone’s position, to be insured against a claim, to have done your training. By the time you have got there, and they have £40,000 in their pot, the cost undermines the advice being delivered.”
So should more be done to break down the stand-off between the regulator, which says ‘We can’t give you any guarantees of what is acceptable’, and providers and advisers, who say ‘We don’t trust that you won’t hit us with retrospective action’?
“We did have an interesting debate at the FSA and I wish I had had the energy to push it further, because my time at the FSA was so dominated by the banks and that stuff. In retrospect, there are other things in relation to conduct that I wish I had spent more time on, but there are only so many hours in the day. And when the banking system is continually fragile, that is where you spend your time,” says Turner.
He supports the idea of a kind of safe harbour approach to advice for areas of the market that are not being served by the current system.
“I wonder whether we couldn’t do more safe harbour regulation – making it crystal clear in advance that there won’t be retrospection if the worry about retrospection is a concern. And I recall debates about whether we could give greater clarity about ‘As long as you did this, that is ok.’ I don’t think we have been creative about it, to be blunt,” he says.
“I think the FSA, and the FCA thereafter, have occasionally faced the industry with the position of ‘We have these principles, you have to meet these principles, and we’re not going to give you detailed guidance of what these principles really mean, but we are going to hold you to account for these principles.’ And I don’t think we have got that quite right.
“We could have done better and therefore the FCA could do better. I remember debating this with mortgages, when we were having the Mortgage Market Review. We introduced a bit of it but I wanted a bit more – so that there is a point where, if the loan-to-value is below a certain figure – perhaps 50 or 60 per cent – bluntly, you don’t have to do the rest of this stuff because the risk is so low that in normal states of the world that is OK.
“There are one or two things where you could remove the detail,” he says.
A proving ground for some form of move away from pure principle-based regulation could, he argues, be the emerging area of robo-advice or digital guidance, where the regulator should be able to say whether an algorithm for advice is acceptable or not.
“We know that most advice fundamentally ought to be reducible to an algorithm once you have all the information. By definition, what an individual adviser is doing is following a process that says ‘If this, then that’, and that is ‘robot-isable’.
“Suppose someone goes to the FCA and says ‘This is my algorithm – on the basis that I advise on this algorithm, do you think you would count that as a good sale or a bad sale?’ I think that would be a reasonable challenge to the FCA. If they say ‘I can’t tell you at that point,’ then something is going wrong.
“Because once you have written it down as a complete algorithm, it would be a bit odd if you couldn’t say that is a good sale or a bad one.”
This sounds at odds with the current approach adopted by the regulator, which is regularly accused by the industry of retrospective regulation, and which counters by arguing that regulatory action has only ever taken place on the basis of the rules in place on the day. That, however, is different from giving a positive steer to an organisation looking to do the very important job of servicing the millions of people stuck in the UK’s yawning advice gap.
“The FCA is resistant to saying that,” says Turner. “But if we go down the algorithmic route, agreeing in advance which ones are good algorithms should be something we think about.”
Turner fully accepts that annuities were poor value for those taking them in their 60s. He would like to see an element of drawdown and an element of annuity at a later stage.
“I don’t know how we are going to do this. Because the process of delivering any sort of individualised process of financial advice for people with relatively small pots is prohibitively expensive. You can’t tailor the advice without it being a too large percentage of the pot. And that is why intelligent policy always involves nudges.
“So what does worry me is that, having successfully introduced a nudge, not a compulsion, a nudge in the accumulation stage, we have moved to a complete freedom and yet we know people do not navigate well through these complete freedoms of choice.” One of the biggest achievements Turner will be remembered for is his landmark Pension Commission, whose second report, delivered just over a decade ago in November 2005, has been widely adopted. Looking back, what does he make of the way it has been put into practice?
“I am fairly pleased that the key elements of what we proposed have been implemented and taken forward. Some elements have been intensified and some were slower to implement than I had hoped, but we are now getting there.
“One understands the reasons why it has been implemented slowly – the cost to business – and we are only just getting towards full coverage by 2019, which is 14 years later. It would have been better to get all that done within five years, but there was the financial crisis in 2008, the recession and the desire not to pile things onto business. But it is getting there.”
What does he make of the fact that around half of people in the target market have not been auto-enrolled?
“We were always concerned about how to get in the lower earnings levels. And this may be one of the issues we have to come back to – those with multiple part-time jobs. Over the past 10 years, we have had more low-paid jobs, more self-employed jobs, often low paid. And we need to return to the issue of how we provide for them.
“The problem for the self-employed was one that always worried us and I don’t think we found a solution,” he says.
There are few people in financial services with a legacy as great as Turner’s. As pension freedoms
and auto-enrolment accelerate the atomisation of workplace pension provision, some will hope the
current regulator heeds his call for a more accommodating approach.
Adair Turner, Baron Turner of Ecchinswell
Career highlights:
1979-82: Chase Manhattan Bank
1982-95: McKinsey & Co
1995-99: Director-general, CBI
2000-06: Vice-chairman, Merrill Lynch Europe
2003-05: Chairman, Pension Commission
2008-13: Chairman, FSA
2008: Chairman, Committee on Climate Change
2013-present: Senior research fellow, Institute for New
Economic Thinking (George Soros’s think-tank)
2016: Author of ‘Between Debt and the Devil: Money, Credit, and Fixing Global Finance’ (Princeton Press)