The Financial Services Authority has issued rules on the regulation of personal pensions ahead of schedule.
In its original consultation paper published in April, the FSA stated it planned to accept applications for Part Four permission from 2 October even though it wasn’t expecting to publish the rules until the end of October.
However the FSA has now published the rules ahead of its starting date for the accepting of applications for new authorisation or a variation on existing permissions in a 156 page document.
Following responses from at least 36 non confidential respondents, the FSA policy statement contains a few amendments to the consultation paper, such as a more streamlined and simplified approach to cancellation rights on Self Invested Personal Pensions (Sipps).
The policy statement reveals the FSA expects any trustees who are acting as a scheme operator or administrator to become an authorised person, while sipps will be classified as “packaged products” and brought under the appropriate regulatory regime.
Although the FSA agrees sipps should not fall into the classification of personal pensions on the ‘menu’, as the different structures mean “the way advice on them is remunerated is very different”.
And it warns it believes “comparing commission a firm might receive on a sipp to the market average firms receive on all personal pension products would be a misleading comparison for the consumer”.
As a result the FSA suggests the menu contains wording highlighting the fact sipps are not classed as personal pensions, adding otherwise “consumers may wrongly assume the pensions product group on the menu includes sipps so it is necessary to make a statement that it does not and alert consumers to their right to ask for further information about commission their adviser might receive”.
But while the FSA says initial disclosure documents (IDDs) and key features documents will need to be provided for sipps it says this will not become mandatory from 6 April 2007 like the rest of the rules.
It is currently conducting a review into key features documents with a consultation paper on the simplification of the Conduct of Business (COB) rules scheduled for October which will cover product disclosure across all packaged products including sipps.
However, as the results of this review will not come into force until November 2007, the FSA has decided to continue with the proposals put forward in the consultation paper and not make Key Features documents mandatory for sipp products between April and November 2007.
It claims it would be “disproportionate and costly for sipp operators if we imposed full key features in the interim period between April and November 2007”, instead it will impose a requirement to provide “suitable and sufficient information” within the interim period.
In addition, the policy statement reveals members will be able to complain to the Financial Ombudsman Service (Fos) about any person who establishes, operates or winds-up a pension scheme, including Sipps.
And members will also be able to claim compensation if necessary from the Financial Services Compensation Scheme (Fscs), while financial promotion restrictions will also apply to promotions inviting or inducing people to enter a pension scheme or to buy a commercial property which is specifically promoted as being suitable for a Sipp.
However, providing the promotions do not name a specific provider, pension scheme or person who is providing advice on whether the investment is suitable, the promotion may be exempt from the restriction.
Meanwhile, the FSA has simplified the rules relating to cancellation rights on personal pension schemes, with sipps being subject to the current 30-day cancellation period for buying a pension plan.
But respondents to the consultation paper expressed some concerns about the practicalities of having a cancellation period for certain investments in sipps, such as commercial property, where a seven-day cooling off period could see a cheap property being sold elsewhere.
As a result, the FSA has decided to allow sipp operators and their customers “to use a procedure which, in certain circumstances, lapses those cancellation rights and allows an initial asset purchase to proceed”.
This essentially means the initial cooling-off period, when buying a sipp plan, can be waived but only when the sSipp operator believes it “has reasonable grounds for believing the scheme member understands the implications of the course of action”.
The FSA also says the practical difficulties of delivering cancellation rights for fresh asset purchases under Sipps, combined with the fact many scheme members would be likely to take advantage of the option to waive these rights, suggests imposing cancellation rights in these circumstances “could be counterproductive and difficult to justify on cost-benefit grounds”.
Final rules also “contain no provisions for mandatory cancellation rights on asset purchases under sipps”, which means no specific waiting period between clients wanting to purchase a commercial property and being allowed to do so.
Andrew Tully, marketing technical manager at Standard Life, says the FSA has streamlined the rules regarding the cancellation period to make it a much more sensible process.
Although he points out one part of the policy statement requires operators of sipps to hold a certain amount of liquid capital to help protect consumers for those operators holding client money or assets.
Tully says this means they will need to set aside the equivalent of 13 weeks of annual expenditure which, to put into context, may be similar to asking firms to hold up to one year's annual profit, which he says may make life difficult for some smaller Sipp operators.
But Tully adds: “There are no real surprises in the document, and we didn’t really expect there to be, this was kick-started by the Treasury, so it was pretty much set in stone by the time it got to the FSA, they just had the job of working out exactly how to do it.”
Alisdair Buchanan, head of group communications at Scottish Life, also says the decision to make sipps packaged products is probably the simplest way to settle the issue of how to regulate sipps.
He says: “The whole reason for the regulation is because sipps were sitting outside the current personal pensions regime despite having similar properties, so the easiest way probably is to redefine them so they fit within the existing rules.”
And Buchanan says the decision to allow operators to provide “suitable, sufficient information” during the interim period until November seems to be a sensible and practical solution.
He says: “Practicality is the key element here, as they can’t close down the market but they can’t fully regulate as people need time to put new systems in place. It needs a sort of semi-compromise, which the FSA seems to have come up with.”
And Dan Waters, director of retail policy at the FSA, says: “Broadening the range of personal pension providers should increase competition and lead to innovation, which will benefit consumers. Bringing all personal pensions under our regulatory umbrella will ensure everyone benefits from the same level of protection.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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