Personal Pensions Misselling: The Causes and Lessons of Regulatory Failure

Abstract

The retail financial services industry is currently undertaking the largest review of past business that has ever been experienced. The reason: the possibility that a large number of people during the period 1988-94 gave up their rights in (or right to belong to) occupational pension schemes (OPSs) in exchange for inferior entitlements in personal pension schemes. Life companies, independent financial advisers, banks, building societies, in short anyone who has sold a personal pension (PP) policy during that time, are being required by the regulators to examine over two million sales to see whether policy holders should be compensated. This is not an example of regulation seeking to punish a few rogue members of an industry; it is the industry itself which has been found wanting by its regulators. This article explores how both industry and regulators arrived at this position: what the pensions misselling episode consists of, what factors caused or contributed to it, and what lessons may be learnt.' Pensions misselling was more than just outrageous selling practices, aberrant salesmen, dubious transfer values or insistent customers, and is due to more fundamental factors than over-expansion by firms or ignorance by or of regulators. It is all of that, but it is also more. The pensions misselling episode manifests a critical failing in the regulatory structure, which cannot simply be blamed on the novelty of the regulation or the climate of the time.