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W(h)ither regulation?

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More and more regulatory requirements... Is it all really neccesary?

I’ve blogged before on the adverse effect of piling more and more regulatory requirements on our industry and gifting regulators with extra enforcement powers. 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.
Where due discernment in applying the principle of proportionality is lacking, politicians are more likely to succumb to pressure for additional resources to tackle compliance failures. Regulators can never have too many staff – especially in a ‘banning’ culture that assumes that unethical or criminal conduct can be stopped in this way.

Most organisations (including government departments) are allocated budgets and obliged to work within that financial limit: cutting their coat according to the cloth. At least in theory; that’s not to say that budget overruns don’t happen.
Regulators appear to operate in a different world though, where they decide how much money they want and extract it from the hapless targets of their activity, in the form of levies and fees. If they need more, they simply hike the levy.

Regulators typically have extensive powers to impose fines. The Financial Conduct Authority (FCA) is becoming more and more enthusiastic about this, raising £229.4 million in 2017, ten times as much as the year before. In the first half of this year alone, fines imposed exceeded £300m.  This money could be offset against fees levied on ‘the good guys’, but it isn’t: it goes straight to HM Treasury.

The Pensions Regulator (TPR) is a much smaller body (at the moment), but its oversight of automatic enrolment has given it a massive opportunity. In 2018-19, TPR issued fixed penalties totally £14.9m for failure to comply with a statutory notice or some specific employer duties, and escalating penalty notices of £53.8m.
Another rapidly-growing source of income for TPR has arisen from the Charges and Governance Regulations. More and more requirements have been added, notably to the ‘Chair’s Statement’ from defined contributions schemes. TPR assesses the quality of their narrative, and even minor shortcomings can trigger an automatic fine. Where does all this money go? You guessed it: straight to HM Treasury.

This is by way of background to two current developments that really warrant the widest possible debate about where we are heading. One is the Pensions Schemes Bill 2019, which is certain to be reintroduced to the next Parliament: this proposes extensive new powers for TPR and fines of up to £1 million for a slew of of new offences.
The other is a consultation about changes to General Levy rates payable by occupational and personal pension schemes. This levy recovers DWP grant-in-aid funding for the core activities of The Pensions Regulator, the activities of The Pensions Ombudsman and part of what the Money and Pensions Service does.

Revenue from the General Levy in 2018/19 totalled £43.5m. Spending in recent years has exceeded revenue, but the gap has been made up from a surplus accrued in past years, before the regulatory burden on pension schemes started to really ramp up. Now the surplus is down to £2m. Over the next decade the government wants to raise levy income by approximately 1,250%, to match projected expenditure; the consultation is simply about how fast this is going to happen.

Well, should it happen? Bearing in mind that ultimately, pension scheme costs have to be paid for by members and employers, we should be looking for a vigorous debate and a fundamental re-examination of the scope and purpose of regulation. Is it all really necessary?

In talking about the next decade, the DWP is acknowledging that if the gap is to be plugged, it will have to be done gradually. The most likely outcome of the consultation is a 10% increase in levy rates for 2020/21 and a wider review to “include engagement with the industry, for example through roundtables and an industry working group”.
The danger though is that we get suckered into a narrow discussion about how to achieve a predetermined objective. A properly-informed and open debate might consider not only the direction and trajectory of travel by regulators like TPR and the FCA, but also whether this is actually sustainable and even worthwhile.

We should insist on starting the debate from first principles, perhaps using Kipling’s “six honest serving-men: What and Why and When and How and Where and Who”.
Ian Neale
Director, Aries Insight