A declaration of compliance is like someone saying: “No need to MOT my car. I know it is road worthy, give me a tick in the box and everything will be okay.” Effectively that is what employers are doing. There is no independent verification that what they have done is compliant. You therefore have to wonder how many schemes have gone through which statistically are being recorded as compliant schemes, but if you lift the lid and look for what the errors might be in the way that the process has been managed you might find that the error rates are frighteningly high. There has been research on this topic and the signs are that there is reason to be concerned at what the error rates might actually be.
Similarly, we are applauding the low level of opt-outs, but there is a lack of robust data around cessation rates. Cessation is when someone stops paying into a scheme after the opt-out window closes. In material terms, it is the same thing when they are no longer in the scheme but they are not counted in terms of opt-out rates.
I don’t know what the cessation rates are. It would be good if there was more publicity about what they actually were because then we might have a more complete idea about the proportion of people who asked to be enrolled.
We need to work harder as an industry to win hearts and minds. People who have been automatically enrolled haven’t said: “I want this.” They have just been on the receiving end of the industrial process.
The industry needs to educate and motive them to not just want to stay in the scheme but put serious levels of contributions in. The other tripwire is we have fallen into the trap of people thinking that because they have a pension scheme, that their pension fund is sorted. Of course, that is nothing like the reality. Contribution rates need to be many, many times higher than they really are to solve the pensions crisis.
The regulator has proposed several new laws in the past year. Are you a fan of all this?
No. Regulation is essentially the worst possible way for our industry to behave properly. Regulation is expensive. There are tens of thousands of pages of regulation just in the pensions market, for example. Regulation leads to cost. Regulation leads to bureaucracy. Regulation is sometimes elegant, but very often it’s not.
If you are asking what is the best possible way for the industry to manage and police itself and operate effectively? It is through values-based leadership. This is where the key people in the industry set high ethical standards by using codes of conduct, self enforcement and self policing to encourage good behaviour in the industry.
You get the regulation that you deserve. The reason we have tens of thousands of pages of regulation and market participants kick-up about the cost of compliance is because the industry has failed to provide values-based leadership to demand of ourselves high-ethical standards.
What annoys me is when an individual or a firm in the industry does something wrong and the rest of the industry almost behaves as if it is business as usual. It shouldn’t be that way.
Take closet tracker funds as an example. If I was an asset management firm that wasn’t involved in closet tracking I would be kicking-up big time right now to demand which firms have been involved in closet tracking as per the FCA’s recent work, saying: “You have done something wrong. You have been caught, explain yourself.” The industry tends not to do that. The good people in the industry tend not to be challenging enough of those people who do bad things.
That is why transparency has a big part to play in all of this because of its transformational power. If we shine a light on these issues and get them out in the open, often people are embarrassed about the truth that is exposed and that embarrassment gets the regulator involved and gets them to change their activities as well.
What the industry needs is tools not rules. We need the mechanisms to encourage good behaviour as opposed to rule books.
Having said all of that, if the market is not behaving then what we need is tough, robust, sharp-teeth regulatory activity, which is what we have been getting. The asset management market study should never have happened.
In my view, the relevant trade bodies and professional associations and the leaders of the industry should have demanded change many, many years ago. That would have meant that the FCA didn’t have to spend millions of pounds of taxpayers’ money regulating behaviour because it would have happened properly in the first place.
