Consultation response: HM Treasury Pension transfers

Response by the Money Advice Trust

Date: October 2015

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Contents

Page 2 Contents

Page 3 Introduction / About the Money Advice Trust

Page 4 Introductory comment

Page 5 Answers to individual questions

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Introduction

About the Money Advice Trust The Money Advice Trust is a charity founded in 1991 to help people across the UK tackle their debts and manage their money wisely. The Trust’s main activities are giving advice, supporting advisers and improving the UK’s money and debt environment. We help approximately 1 million people per annum through our direct advice services and by supporting advisers through training, tools and information. We give advice to around 200,000 people every year through National Debtline and around 40,000 businesses through Business Debtline. We support advisers by providing training through Wiseradviser, innovation and infrastructure grants. We use the intelligence and insight gained from these activities to improve the UK’s money and debt environment by contributing to policy developments and public debate around these issues.

Public disclosure Please note that we consent to public disclosure of this response.

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Introductory comment We recognise that this consultation is mainly concerned with the options available to address barriers to people switching their pensions in order to access the new pension freedoms.

As a provider of debt advice rather than regulated financial advice on pensions, we have limited our comments to issues we have identified in relation to the provision of debt advice. Overall, we would like to see more clarity on the wider implications of the pension freedoms and how they affect debt advice. We also seek clarification in relation to the boundary with regulated financial advice. We are particularly concerned that there will be implications for advice providers in relation to their professional indemnity insurance, unless the boundaries are made much clearer and clear, straightforward guidance provided to protect debt advice agencies, their clients, and their clients’ pension funds.

We are also concerned that there is a degree of uncertainty as to how pension freedoms affect the range of debt options, and would appreciate further consideration as to the policy implications of these changes.

In terms of pension transfers and early exit charges, we would support measures such as a cap on charges to restrict early exit penalties to ensure that people do not face unjustifiable charges when moving scheme or accessing their pension savings within their existing scheme. We would also support measures to make the process for transferring pensions from one scheme to another as simple and straightforward as possible. Whilst we cannot comment on the technical issues raised in the paper in relation to safeguarded benefits, we are concerned that there are various issues in relation to when and how financial advice should be sought. We are also concerned that the fees charged will deter people will smaller pension pots from seeking advice. We welcome the new FCA consultation which is looking at amending the CONC rules and guidance in relation to pensions and debt advice and hope this will go some way to improve the current position.

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Responses to individual questions Question 14: What evidence do you have of wider issues regarding the implementation of the pension flexibilities that need to be addressed? We are pleased that as part of the consultation, the Government would welcome submissions on any wider issues and challenges that we are aware of regarding the new pension freedoms. We have set out our broader concerns from the perspective of the free debt advice sector below. We have raised these issues with the relevant stakeholders and are working with the debt advice sector to try to gain clarity where possible. FCA regulation and financial advice We would be grateful for any guidance that can be provided on these issues so that we can ensure we provide high quality, clear and consistent debt advice to our clients. We need to ensure we do not run the risk of breaching any regulatory or professional indemnity constraints by straying into the provision of regulated financial advice. As you will be aware, organisations in the free debt advice sector are authorised by the FCA to offer debt advice to the public. Most of our sector will be authorised under the limited permissions regime. We have become very concerned as to what advice we can provide for clients with pension pots who are coming up to the age 55 from April 2015 onwards. We clearly do not want to stray into the realm of FCA regulated advice on financial products. We are concerned that providing advice in the course of debt counselling about cashing in a pension pot would risk enforcement action by the FCA. We are concerned that debt advisers may feel obligated or required to refer clients to independent financial advisers for product-related advice but that many of our clients in debt and with smaller pension pots will not be able to afford to pay for this advice. We also understand that in some cases IFAs do not provide advice if a pension pot is worth less than a certain amount. We are very concerned that the absence of IFAs who are willing to advise those with small pension pots will increasingly become an issue. We are concerned that our clients will be in a position where they are unable to pay for advice from an IFA, and will be referred back to their debt adviser. However, as debt advisers we will not be in a position to provide regulated pensions advice either. We are also keen to avoid any possibility of a “referrals loop” whereby clients are sent to Pension Wise for pensions guidance and then referred back again for debt advice. We understand from the Work and Pensions Select Committee “Pension freedom guidance and advice” evidence session, that Pension Wise providers see enhanced signposting for debt advice and other advice areas as a priority for the development of the Pension Wise service.

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We are also concerned that debt advisers will now be required to give advice to people with pension pots that include suggesting that the pension be used to pay back creditors. This could be seen to undermine the public policy purpose of pension provision. If a pension pot is used to clear debts at age 55, is our sector vulnerable to complaints by clients in future when it becomes clear that they no longer have a pension to rely on as income in their old age? Informal payment arrangements We are concerned that creditors will put pressure on individuals in debt to realise their pension and clear their debts, either in full or via a full and final settlement arrangement. The FCA CONC rules have some helpful rules and guidance in this area, but the protections the rules might offer are not fully spelt out. CONC 7.3.10R (1) requires that “a firm must not pressurise a customer to pay a debt in one single or very few repayments or in unreasonably large amounts, when to do so would have an adverse impact on the customer’s financial circumstances.”1 In addition, under CONC 7.3.4R “A firm must treat customers in default or in arrears difficulties with forbearance and due consideration.” Whilst it is arguable that a creditor would not be able to demonstrate that such pressure to use a pension pot would not have an impact upon a customer’s financial circumstances, this is open to interpretation. We would like to see creditors restricted from pressurising borrowers in this way. We therefore welcome the FCA consultation that now sets out new guidance in this area.2 We will be responding with further thoughts specifically in relation to how this guidance will work in practice. The forthcoming guidance should be embedded in industry guidance such as the Lending Code in future. Debt management plans We are concerned that we will need to consider a referral for pensions advice for anyone considering a debt management plan either who is coming up to age 50+ or who is on an existing debt management plan that is scheduled to finish after age 55. We foresee creditors putting pressure on clients in existing debt management plans to cash in their pension pot and clear their outstanding debts by way of full and final settlement. We hope that the FCA consultation regarding the expansion of the CONC rules in this area will help to clarify the advice we should be providing under these circumstances. Debt relief orders (DROs) Under the changes to the DRO rules which came into effect on 6th April 2011, pensions which are "approved" are excluded from the calculation of assets in a DRO. Unapproved pensions will still be classed as an asset. However, it appears that from April 2015, this position is no longer the case. The Insolvency Service has issued guidance for official receivers entitled “Undrawn pension entitlements in insolvency: summary of new guidance”3

that states where the value of an undrawn pension fund exceeds the amount of debt owed, 1 https://www.handbook.fca.org.uk/handbook/CONC/7/3.html 2 Pension reforms – proposed changes to our rules and guidance http://www.fca.org.uk/news/cp15-30-pension-reforms 3 https://www.gov.uk/government/news/undrawn-pension-entitlements-summary-of-guidance-for-insolvency-practitioners-and-debt-advisors

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the application may be refused. This runs the risk of undermining the 2011 amendments to DRO rules which were beneficial for DRO clients and protected pension assets. The guidance does clarify that an undrawn pension fund should not be included in the calculation of income where the funds might be drawn into payment because the applicant is 55 or over. This makes it clear that only funds which are in payment as income should be included when considering surplus income. However, this is based upon an interpretation of the case of Horton v Henry [2014] EWHC 4209 (Ch), which is still awaiting a Court of Appeal decision which is not likely to take place until early 2016. Bankruptcy The Insolvency Service guidance has clarified their position with regards how they intend to treat pensions in IVAs and bankruptcy from April 2015 onwards. Again the Insolvency Service position is based upon their interpretation of the Horton v Henry case which is pending a Court of Appeal decision. It is very helpful to have clarification that the official receiver in bankruptcy cannot include any undrawn pension funds into any calculation for an Income Payments Arrangement. However, the Insolvency Service guidance now states that where the client is over 55 with an undrawn pension pot, the official receiver must consider whether the value of the pension exceeds their debts and if so, whether the “insolvency test” has been met. If already bankrupt, the official receiver could apply for the bankruptcy order to be annulled. This seems to reverse the intention of the Welfare Reform and Pension Act 1999 which was intended to keep pensions out of the bankruptcy estate. Individual voluntary arrangements (IVA) Again, the situation is uncertain in relation to IVAs. An IVA may have been set up by the insolvency practitioner to contain a clause that excludes any pension funds, so that the pension does not form part of the IVA unless the client decides they wish to draw funds from the pension. However, this is not a clause that is required by the IVA protocol currently, and may not appear in an IVA proposal or be automatically agreed by creditors. A client cannot be forced to draw their pension, and creditors cannot expect funds to be realised, unless it forms part of the IVA proposal. It is likely that some creditors will take into account the pension fund size when voting on an IVA proposal. Unless pension funds are routinely excluded from IVA proposals, an IVA will become a less reliable remedy for debt problems, and the policy intention of an IVA will be undermined.

For more information on our response, please contact: Meg van Rooyen, Policy Manager meg.vanrooyen@moneyadvicetrust.org

0121 410 6260

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The Money Advice Trust 21 Garlick Hill London EC4V 2AU Tel: 020 7489 7796 Fax: 020 7489 7704 Email: info@moneyadvicetrust.org www.moneyadvicetrust.org