Bank of England and Financial Services Bill [HL]

Baroness Drake Excerpts

Tuesday 3rd May 2016 Lords Chamber

[Lord Bridges of Headley]

My Lords, Commons Amendment 10 places a duty on the Financial Conduct Authority to cap early exit charges that act as a deterrent to people accessing their pensions early under the new pension freedoms. The Government took the step of introducing this amendment in Committee in the Commons following detailed evidence-gathering exercises that showed the extent of consumer detriment caused by early exit charges and the imperative to act quickly in order to limit this.

Evidence from the FCA found that there is a small but significant cohort of people in contract-based pension schemes for whom early exit charges were posing a real barrier to accessing the freedoms. The FCA found that some 670,000 people over 55 in such schemes face an early exit charge, and for 66,000—almost one in 10—this charge would exceed 10% of the value of their pension pot. In some cases these charges would be high enough to make it uneconomic for an individual to access their pension flexibly, while in others, the presence of an early exit charge may have acted to discourage individuals from accessing their pension when it could have been the best thing to do in their circumstances.

It is therefore clear that the Government’s objective of ensuring that everyone who is eligible can access their pension savings flexibly is not being met and that action is needed to ensure that all consumers are able to make use of the freedoms. In order to ensure that the cap benefits current consumers who are eligible to use the freedoms now, subsection (4) of this clause provides that any cap will apply equally in relation to existing arrangements, as well as those entered into in the future. The decision to introduce a measure which will have retrospective effect in this way is not one that the Government have taken lightly; we recognise industry concerns about the way this cap will affect existing contractual agreements.

However, the Government’s view is that this action is warranted to ensure that individuals are not deterred from accessing their pension flexibly because of contractual terms they entered into long before the freedoms were introduced. These people would not have been in a position to make an informed decision about potential early exit charges when they signed up. Even some pension providers have conceded that industry practices have moved on and that the introduction of the pension freedoms means that these charges pose a much more significant barrier now than when they were agreed.

To be clear, this measure is about ensuring that consumers are adequately protected against early exit charges being imposed at a level so high as to deter them from accessing their pension early under the pension freedoms. This clause is not about determining the fairness of these, or other existing contractual terms and conditions more generally. That is a separate, wider issue which this Government have recently addressed in the Consumer Rights Act 2015, legislation which the FCA has the power to enforce against the firms it regulates.

It is important to consider the nature of the contractual terms affected through this measure. The Economic Secretary made it clear when introducing this clause in the other place that terms providing for market value reductions should not be subject to the cap on early exit charges. Subsection (8) of this clause gives the Treasury a power to introduce secondary legislation to provide for this exclusion to the FCA’s duty. FCA rules already place rules on how firms may apply a market value reduction, and the cap on early exit charges will not add to or modify these rules. Furthermore, in order to ensure that the level of any cap is fairly set, the FCA will determine the precise level of the cap, following further public consultation and cost-benefit analysis. The FCA will be setting out its next steps in this process shortly, with a view to implementing this cap before the end of March 2017.

This clause gives the FCA the flexibility to apply different rules to different classes or descriptions of charges if it finds that the evidence demands this, but the Government’s expectation is that any FCA cap or prohibition will apply equally for all those consumers accessing their pension aged 55 and above, up to their expected retirement date, rather than being set at different levels for different age groups. Although data collected by the Pensions Regulator suggest that early exit charges are less prevalent in trust-based pension schemes, we will also act to ensure that all members, regardless of scheme, are protected from excessive early exit charges, and the DWP and the Pensions Regulator will work alongside the FCA as they develop the design and level of the cap for contract-based pension schemes to ensure that this is possible.

The pension freedoms have given consumers much greater freedom of choice in the financial decisions they make at retirement. Commons Amendment 10 will provide important protections to consumers in contract-based pension schemes, ensuring that they are not deterred from using the pensions freedoms by excessive early exit charges. I beg to move.

[Baroness Drake (Lab)]

My Lords, I take this opportunity to thank the Minister for meeting my noble friend Lord McKenzie and me to discuss this amendment in detail. I am most grateful for that. As has been said, the amendment places a new duty on the FCA to make rules to prohibit or cap early exit charges that act as a deterrent to people accessing their savings under the new freedoms. This amendment is particularly interesting for two reasons. Unusually, it introduces legislation with retrospective effect on existing contracts and a new deterrent regime in addition to the existing fairness regime in financial conduct regulation—in effect, charges must not be at a level that deters people from accessing their savings.

The Government believe the legislation needs retrospective effect because of the need to protect existing and future consumers, and—more interestingly, when one reads the detail of their proposals—that fairness should not be determined solely by reference to whether or not it was fair to include a term in a pension contract a decade or decades ago, but that it has to be looked at against how unfair contracts legislation has evolved since those contracts were entered into, and through the new lens of the recent pension freedom reforms, all of which arguments I agree with. But given that the Government have taken the decision through this amendment to enable retrospective changes to existing pension contracts and recovery of amounts paid or payment of compensation for charges made in contravention of the new FCA rules coming into force in March 2017, and that the pension freedoms, which provide the new lens for looking at fairness, were introduced in April 2015, I cannot understand why the consumer protection in the new FCA duty does not apply with effect from April 2015. Why is it necessary to wait until March 2017 when the FCA rules are implemented—a full two years after the pension freedoms were introduced—before consumers are protected by the provisions on fair access to savings?

The Minister advised in his letter of 16 March that the Government are introducing this amendment,

“in light of detailed evidence gathering, and an imperative to act quickly in order to limit the extent of consumer detriment caused by early exit charges”.

The Government’s main defence for this two-year gap from April 2015 to March 2017 in protecting consumers is that savers who access savings between these two dates from a scheme whose early exit charges are considered excessive under FCA rules to be implemented in March 2017 cannot have been deterred by those charges and presumably are therefore not in need of retrospective protection. That argument simply does not sit comfortably with the Government’s view that some people are being denied fair access to their savings. It suggests that the new deterrent regime trumps fairness—in effect, if a person accessed their savings they have not been deterred, ergo the early access terms are fair.

There are many reasons why people may access their pension savings during that two-year gap, even though the charges may be excessive. There may be ill health or other compelling personal circumstances that override the deterrent effect. People may not be aware of, or understand, the excessive early exit charges, so do not make their decision on an informed basis. The FCA data reveal that 78% of affected consumers rated their pension provider’s explanation of the exit charge and its level as poor.

In his letter of 16 March, the Minister comments:

“In order to ensure that the provision benefits current consumers who are eligible to use the pension freedoms now … this clause provides that any prohibition or cap imposed by FCA rules applies equally in relation to existing pension contracts, as well as those entered into in future”.

In the light of that statement, it is most unfortunate that the amendment excludes from the protection consumers accessing their savings between April 2015 and March 2017, even though in other circumstances it allows for a retrospective effect.

[Baroness Kramer]

My Lords, I echo the objections just raised by the noble Baroness, Lady Drake. It is quite inexplicable that “retrospective” does not mean that the new regime will be recalculated from the date that people were able to access their pension pots. It seems equally unfair for people to have paid an inappropriate exit fee a year ago as it is for them to pay an inappropriate exit fee a year from now. Has the Minister considered how this will tend to inhibit decision-making by families until the new regulations are revealed? Instead of making the best decision for the family, there will be great pressure to delay that decision until the rules are clearer and, presumably, the exit fees are removed.

The amount of money involved in this process cannot be substantial but to the individual family that has been impacted, it is certainly significant. I really do not understand the Government’s thinking on this issue.

--- Later in debate ---

[Lord Bridges of Headley]

My Lords, I thank noble Lords who have spoken in this debate. Let me pick up on the final point which was just made by the noble Lord, Lord McKenzie. I heed what he says about getting access to this amendment sooner but I would somewhat refute what he says about the rushed nature of the entire policy. When this problem was first identified the Government took immediate action to address it by embarking, as I have mentioned, on the FCA evidence-gathering exercise. However, I thank in particular the noble Lord and the noble Baroness, Lady Drake, for the time that they have spent discussing this clause and amendment with me. I have already committed to write to them shortly to address a number of the very forensic and detailed points that were made to me last week. I will do that as soon as I possibly can.

A number of your Lordships including the noble Baroness, Lady Kramer, raised a valid question about why we are not backdating this measure to 2015, when the pension freedoms came into effect, and not requiring providers to pay back the early exit charges which they received from customers in the period between April 2015 and when the cap comes into effect. I would make two points on this, as already outlined in my remarks. First, the purpose of this measure is not to require the FCA to assess the fairness of the contractual terms of historic pensions. The intent of the measure is to ensure that early exit charges are not imposed at an inappropriate level which deters consumers from accessing their pension early under the pension freedoms. Clearly, those who have decided, or will decide, to access their pension despite an early exit charge have not, or will not, have been deterred by the existence of such a charge.

Secondly, I accept the observation that, once in effect, this cap will obviously benefit some consumers who would not have been deterred by the early exit charge in their contract. However, the Government believe that it is an ordinary consequence of introducing a new measure of this sort that those—in this case, consumers—who take an action before the law comes into force do not benefit from the new law. Moreover, it is right that the Government do not rush to make legislation which has any sort of retrospective effect but that they do so only when there is clear and compelling evidence that it is in the public interest, and then make that retrospection as minimal as possible to ensure that the action is proportionate. That is what I and the Government believe that this clause achieves. It is proportionate and focused on those who greatly need it, and that is why I commend it to the House.

[Baroness Drake]

Before the Minister finishes, if I may, the defence is given that this is not a fairness regime but a deterrent regime and that there is therefore no evidence of deterrence and no need to make it retrospective. But on the FCA’s own evidence, the knowledge and understanding of these charges is quite poor. It is difficult to be deterred if you do not know that you are being exposed to excessive exit charges. People will not know that they are being exposed to them until the FCA has done its business, which will be by March 2017. It seems a little unfair. At the very least, perhaps the Government should be taking steps to ensure that companies and other agencies make consumers aware that if they wait until March next year, they may get a better deal.

[Lord Bridges of Headley]

The noble Baroness, as so often, makes a very valid point. This is precisely what the consultation sets out to address. It aims to ensure not just that consumers are properly protected but that they make informed and proper decisions. I will write to the noble Baroness to make these points in more detail.