01 Feb ARC’s response to joint DWP/Treasury consultation on pensions scams
We are pleased to have the opportunity to comment on these proposals. ARC Pensions Law is a leading firm of specialist pension lawyers specialising in workplace pension schemes. Our client base consists of Defined Benefit, Defined Contribution and Hybrid schemes and their sponsors.
Key points summary
- At least some of the protections should be available to all investments
- There should be scope for members to avoid a tax penalty in appropriate cases, for wider public benefit
- Care is needed in the way in which the new law is communicated to the public, emphasising their continued need for vigilance
- It would be helpful to extend the limits on statutory transfers to compulsory non- statutory ones.
- A statutory discharge for insistent customers and ability to delay with reasonable cause would significantly help trustees who are trying to protect their members.
- The regime should be regularly reviewed for effectiveness.
Why restrict protection to registered pension schemes?
The issue of pension scams is a worrying, and growing, one. The freedom and choice regime introduced in April 2015 reduced slightly the opportunities for scammers to trick vulnerable scheme members into accessing their accrued pension monies in greater proportions than permitted under the tax rules, and defraud them. However, that was more than offset by the opportunity for scammers to hide within the new regime that makes the transfer of accrued pension savings appear to be mainstream and even an officially recommended action, and thereby appear legitimate to unwary members, creating an environment where fraud can flourish.
The statistics contained in the consultation paper show the extent to which this is now occurring. Moreover, Treasury policies that blur the traditional distinctions between savings for income in later life when employment earnings reduce and cease – a pension – and other savings, will only enhance the environment and opportunities for scams.
We support the main thrust of the consultation and its objective of reducing the opportunities for members to be defrauded of their accrued pensions savings. However, we do not believe that the proposed new protective regime should be limited to monies from registered pension schemes. A taxation environment is being created that encourages individuals to use other savings vehicles either alone or in conjunction with registered pension schemes to provide for later life financial needs (this is so in practice despite the focus upon membership of registered pension schemes through the automatic enrolment regime, which includes the only opportunity to receive tax-relieved employer contributions). Consequently any benefits from the new anti-scam regime will be restricted if it is applicable only to assets from registered pension schemes.
Individuals with free assets to invest are more likely to be older members of the population, who are also more likely, as their age increases and their cognitive abilities may reduce, to be at risk. Therefore at least some of the solutions proposed in the consultation document, such as the ban on cold calling, should apply in respect of all of an individual’s investments, regardless of where they are held. Limiting the application of the proposals to assets in registered pension schemes would involve an arbitrary distinction between selected types of investments which on its face is difficult to justify. It might also appear to be focused more on protecting tax revenue than members’ accrued funds.
Removing protection for scammers
Section 1.1 of the consultation paper also contains the interesting observation that some members who have lost pension savings due to a scam are reluctant to report the fact due to fear of suffering the tax penalties that result from unauthorised pension access. As a matter of public policy that situation is surely not sensible. It provides the scammers with further protection through imposing fear on their victims, and by so doing exposes more individuals to similar risk of losing money.
Where it is clear that the member entered into the transaction in the knowledge that in so doing they were acting in contravention of the tax rules or were reckless or negligent in ascertaining the effects of their actions, and therefore at risk of a tax penalty, it is reasonable for the penalty to apply. In order to encourage disclosure to the authorities by the affected member, we recommend that there be discretion given to HMRC to waive the penalty where the member reasonably did not know or understand the likely outcome of their actions. The burden of proof to establish that the member did in fact possess that knowledge and understanding should be on HMRC, if they wish to apply the penalty in any case.
It might also be appropriate to extend this further into an amnesty even where HMRC can show that the member was reasonably aware of the nature of the transaction and its legal implications. If such members were to provide the authorities with full access to their records in respect of the transactions, the “reward” could be the opportunity for the tax charge to be waived.
Care over language
Finally, we are concerned over several references in the consultation paper that a cold calling ban will “cut off a key source of pension scams” and providing a simple message to the public “that you will never be cold called about your pension”. If simply making an action illegal was a guarantee that it would never occur then there would be no fraud or theft. Later in the paper the language becomes more balanced, stating that no “legitimate” firm will ever cold call.
This distinction is small, but important. The more nuanced wording will convey a message that through exercising reasonable care individuals should remain safe. The more general wording could convey the erroneous impression that if they do receive a cold call it will be safe to engage with the caller, since otherwise the caller would be acting illegally and the law ensures that no one would do that.
Question 2.1. Does the definition in 2.1 above capture the key areas of consumer detriment caused by pension scam activity?
We believe it does.
Question 2.2. Are there any other factors that should be considered as signs of a scam?
No doubt over time as the scammers seek to stay ahead of the authorities other patterns will emerge, but for the moment the factors listed appear to be the key ones.
We would suggest however that if this is to form a list for future publication in any guidance document, under the “high pressure sales tactics” heading the further example of the application of time pressure placed upon an individual should be highlighted, as it is a common tactic employed by scammers.
Question 3.1. In your experience, how are consumers affected by cold calling about pensions? Do any consumers benefit from cold calling about pensions?
As the consultation paper suggests, cold calling by telephone can be very persuasive and older people may generally be more susceptible than younger ones.
It is conceivable that some consumers may benefit from cold calling, such as where they would otherwise not have come across relevant information about an organisation or investment opportunity that might be beneficial to them. However, we consider that the number of potential instances of such an opportunity being missed does not outweigh the general benefits that a blanket ban on cold calling should deliver.
Question 3.2. Do you agree that the scope of the ban should include the actions set out in paragraph 3.5 above? Are there any other activities that should fall within the scope of the proposed ban on pensions cold calling?
We agree that the scope of the ban should include the actions set out. However, no one should be under the illusion that this is the full extent of the issue. Scammers have demonstrated considerable skill in changing tactics to stay ahead of the counter measures deployed, and no doubt will continue to do so in the future. The legislation should therefore be drafted to set out a general rule, banning cold calling in respect of any aspect of pensions (and other investments), with any detail such as that set out in paragraph 3.5 clearly expressed as examples, without being a comprehensive list. Such details could be reserved for guidance issued by the relevant enforcement authority, which would allow for it to be updated swiftly as new examples emerge.
It is also worth mentioning here the issue of confining these measures to assets from registered pension schemes. In the light of the expanding measures to break down the traditional distinctions between pension schemes and other savings and investment arrangements, such as through the introduction of the Lifetime ISA, any of an individual’s savings could be at similar risk. The methods employed to gain access to these could be similar to those we have seen applied to pensions, or entirely different.
The overriding message to the public, to those responsible for the safety of members’ monies, and to the authorities should therefore be one of continued vigilance.
Question 3.3. Do you agree that existing client relationships and express requests should be excluded from the proposed ban?
Yes. We also agree the general boundaries as expressed in section 3.6 of the consultation paper.
However, we are aware of people receiving cold calls where the caller purports to be following up on previous written contact that never occurred. Although it is impossible to prevent the determined scammer from ignoring the law, it might make this more difficult if a caller purporting to be following up an earlier contact were required to state at the outset of the call the date and form of the alleged previous contact.
Question 3.4. What would the costs and benefits be of extending the proposed ban to include all electronic communications?
We do not have sufficient first-hand knowledge to comment on the potential costs of extending the ban in this way. However, given the continued increase in the use of electronic methods of communication it would appear to leave the proposed new regulatory regime with a significant achilles heel if the restrictions were confined to telephonic communications.
Question 3.5. How can the government best maintain the clarity of existing PECR concepts in light of the proposed ban on pensions cold calling?
The more specific and narrow the proposed ban, the more difficult it will be to delineate effectively the distinction between pensions monies and more general savings and investments. This is a further reason for not introducing such a distinction.
Question 3.6. How else can the government best ensure consumers are aware of the ban?
Advertisements on television and radio, and articles in consumer protection programmes have proved effective in respect of other pensions and financial matters and we believe could usefully be employed here. However, as highlighted in our introductory comments above, care must be taken over the messaging, to ensure that there is no possibility of inadvertently misleading members into a false sense of security, while trying to make it simple.
Nevertheless the message must be simple, in order to be effective. One way in which the message may become overcomplicated is if there are references to the involvement of multiple statutory authorities. The messages should be published under the banner of one authority, to whom all communications should be addressed, even if that authority is at times only acting as a gateway to others.
Question 3.7. Do you have any views on the enforcement mechanism set out in paragraphs 3.10 above?
Although we recognise and applaud the enforcement successes of the ICO highlighted in paragraphs 3.10 in respect of its wider remit, the number of illegal cold calls that continue notwithstanding is a clear indication of the size of the problem. We would not want to see a bureaucratic system that impedes lawful commerce and accept that resources for enforcement are necessarily limited. However, we believe that in order for any new system in respect of pensions/savings to have the required impact and to gain the trust of the public, it will be necessary to achieve a higher success rate than that achieved hitherto by the ICO’s efforts. The actions necessary to achieve that result would be matters for the ICO and the government to define.
Question 3.8. Is there any reason why legitimate firms’ business models should be affected as a result of the ban?
It is unlikely that legitimate firms whose sales methods currently include cold calling put pressure on people they call for immediate decisions. Therefore any changes required as a result of these proposals will be around the mode and tone of the first contact.
Question 3.9. Do you have any other views or information the government should consider in relation to the proposed ban on cold calling in relation to pensions?
Only those mentioned in our answers to other questions.
Question 4.1. Do you agree with the proposal to limit the statutory right to transfer in this way, or should this be further limited? If so, in what way and why?
We agree with the proposal.
Question 4.2. Would a requirement to evidence a regular earnings link act as a major deterrent to prevent fraud? How could the requirements be circumvented?
A requirement to evidence a regular earnings link would be helpful in deterring proposals to transfer to another regulated pension scheme where fraud is involved.
Question 4.3. How might an earnings and employment link be implemented? Should the onus be on the scheme member to provide proof of earnings?
The onus should be on the member who should be required to show valid proof in the form of appropriate tax documents from HMRC. If the onus was on the alleged employer/adviser, the opportunities for fraudulent misstatement would be too many.
Question 4.4. What would be the impact and cost to trustees/managers/firms?
We believe that the situation and costs would be unchanged from those being incurred in practice now by diligent trustees and other parties trying to prevent fraudulent transfers.
Question 4.5. Under the proposals, how would the process for “non-statutory” transfers change for trustees or managers? What would they need to do differently from the current situation?
They would need to adopt a standard process which would increase the likelihood of their identifying those involving scams. This would include power to require the provision of further documentary evidence in connection with the request and should allow for the trustees to undertake further investigations on their own account where they deem it appropriate.
The process would have to be applied in each case, unless to counter concerns over administrative cost (particularly in respect of smaller schemes) there were to be a statutory discharge provided for scheme trustees or managers acting reasonably taking a risk-based approach. In that case there would have to be a general acceptance that the lower level of review would increase the risk of fraudulent cases slipping through the net.
It is important to note that non-statutory transfers are not always discretionary. Some pension scheme rules require trustees to make transfers when requested, whether or not required by the legislation. It would be helpful to extend the limits on statutory transfers to compulsory non- statutory ones.
Question 4.6. What are the pros and cons of introducing a statutory discharge form for insistent clients? How effective would this be as a means of combating scams?
Such a form would be a useful tool to relieve the pressure to transfer that trustees currently often find themselves in. However, insistent clients are on the whole unlikely to be deterred from pursuing their request by having to sign a form that they would probably take little notice of.
Question 4.7. How could it be ensured that a statutory discharge of responsibility did not reduce the requirement on firms and trustees to undertake due diligence?
It should be the final step in a proscribed process, with the effectiveness of the discharge conditional upon the process having been followed. In the case of trustees, they are also bound by their trust law duties to beneficiaries.
Question 4.8. What are your views on a “cooling off period” for pension transfers? Do you have any evidence of how this could help to combat pension scams?
It should be particularly helpful in cases where the member is being put under pressure to satisfy an arbitrary time deadline imposed by the scammer. However, it would be negated if during that time the transfer was actually made, as where a scam was involved there would still be a strong possibility of a resultant loss.
This still leaves trustees with a potential problem where they feel strongly that an insistent member is at risk if the transfer takes place. It may be appropriate to allow trustees to exercise their equitable discretion to protect the interests of their beneficiaries by delaying a transfer in good faith. This could take the form of a statutory protection against a claim by a member who suffered an investment loss or lost an investment opportunity as a result of the delay.
Question 4.9. What additional measures or safeguards could be put in place to ensure that trustees or managers appropriately handle transfers that do not meet the new proposed statutory requirements?
The new regime should include a statutory duty upon trustees or managers not to refuse transfers without good cause, following reasonable investigations. Such investigations should allow for the fact that there may be good reason why, for example, there is no regular earnings link to the proposed receiving arrangement. This duty would, as now, be overseen by the Pensions Ombudsman.
Question 4.10. Are there other potential risks that this proposal might present? Do you have any suggestions as to how these risks might be mitigated?
It will not be possible to devise a regime completely devoid of risks. However, we consider the basis set out in the consultation paper, subject to our comments herein, strikes a reasonable balance.
Question 5.1. Do you agree that new pension scheme registrations should be required to be made through an active company? If no, what are the legitimate circumstances in which a dormant company might want to register a new pension scheme?
A requirement that new pension scheme registrations should be required to be made through an active company would be a useful tool in the fight against scams. However, there would be potential problems with such an approach. For example, it is quite common for new dormant companies to be set up with a new trust scheme to take in employees from the active company, either as a Special Purpose Vehicle or simply to take in the employees. If the proposals were in force, those transfers would have to go to Group Personal Pensions.
A suitable compromise therefore may be to require the trustees of a receiving scheme being set up under a dormant company to demonstrate to HMRC that the scheme falls within a list of legitimate purposes, when seeking registration.
Question 5.2. Are there any further actions that the government should consider to prevent SSASs being used as vehicles for pension scams?
In all regulatory regimes a balance must be struck between the level of regulation and the returns achieved. There is no system that will eradicate every risk. We consider that, within the regime largely as envisaged by the consultation paper and incorporating our suggested amendments, the parties involved will generally ensure that the number of instances of scamming will be kept to a low level. Nevertheless, there will be no room for complacency, and so as a backstop the responsible regulatory bodies must continue to monitor activity and stand ready to adapt the regime according to future developments.
Although SSASs do appear to be used by scammers, there are a large number of legitimate SSASs in existence often operated by owner-managers wo do not have particularly deep pockets to deal with further regulation. It would seem unfair to penalise them, rather than the industry as a whole, for the behaviours of dishonest people who are using the same structure.