Ian Neale discusses how one size does not always fit all.
Whenever someone does something truly horrible, the public reaction typically focuses on whoever in authority is deemed responsible for failing to prevent it. Last week in Manchester for example, it was MI5 and the police.
Especially where staffing has recently been reduced, calls swiftly follow for more recruitment and more money to be given to the authorities. Sometimes we hear suggestions that they should have additional new powers.
Less often, commentators assert that their existing powers are more than adequate, and that more efficient allocation of resources should obviate the need for a massive funding increase. It is very rare for such criticism to be voiced by insiders, and even rarer for whistleblowers to act (despite the nominal protection which might grace the law in places).
In pensions we have two regulators at work. The Pensions Regulator (TPR) has extensive information powers which it uses to target schemes judged to be high risk or inadequately managed. In the case of final salary schemes, this is intended to reduce potential claims for compensation from the PPF.
The other regulator is the Financial Conduct Authority (FCA), which is increasingly involved in the pensions industry. Of course its statutory objectives are broader than TPR's, being to ensure that the financial markets work well, with particular reference to proper competition, integrity, and consumer protection.
Protection of pension scheme members' benefits is a key objective for TPR (although protection of the PPF seems to be a higher priority); not least because in company with the FCA, it has identified a notable asymmetry of information between pension providers and savers.
Last week for example the FCA, having decided that the retirement income market was not working well, set out in PS17/12 new rules which require firms to inform consumers how much they could gain from shopping around and switching provider, before they buy an annuity.
So the idea is to make rules and then police them: rooting out bad practice and unethical practitioners along the way. Inevitably there are degrees of non-compliance: the problem for a regulator is in discerning the significance of a failure.
Too often during the past twenty or thirty years we have seen illustrations of the old adage 'hard cases make bad law': treating an exceptional case as if it represented a common threat results in a burdensome panoply of law. Think 'Maxwell' and the 1995 Pensions Act, et seq.
It is difficult, risky and often prohibitively expensive to challenge either TPR or the FCA; even in cases where there is no evidence of attention by the regulator to the key principle of proportionality (ie relating enforcement action to the seriousness of the breach and the risks of harm caused by the breach).
TPR has always been keen on the idea of using trigger points as a kind of filter in its risk-based strategy. All well and good if treated as alerts, but a more literal meaning of 'trigger', ie to set off an automatic chain reaction of events, is becoming worryingly more common.
In any complex, system as the number of factors increases arithmetically the number of potential interactions between them follows a more geometric progression. That is to say the degree of complexity accelerates. The standard solution is to automate, which increases the incidence of unfair and even irrational outcomes ('computer says no').
All too often the effect of new laws and regulatory requirements is to gift the regulators with a new set of sledgehammers to deploy in a one-size-fits-all manner against any scheme or person triggering a compliance failure.
In a target-driven culture it risks smaller and easier cases being prioritised above more complex ones where the money at stake may be massively more.
If we cannot prevail upon a regulator to prioritise the application of sufficient due discernment and proportionality, then it follows we either succumb to pressure for more staff (there will never be 'enough') – or accept that mistakes happen, unethical or criminal conduct cannot be simply proscribed, and in banning this or that many babies will be thrown out with the bathwater.
Written by Ian Neale, Director, Aries Insight.
