There is a Latin saying that has been is at the heart of the sale of goods and services in the UK. “Caveat emptor” meaning Let the buyer beware, puts a degree of responsibility on the customer when they make a purchase, to ensure that what they are buying is fit for purpose. It is most commonly applied in the purchase of property, but has tended to be a principle that can be applied to most cases.
As a simple example, when somebody buys a property, caveat emptor places a responsibility on the purchaser to test for obvious defects and faults. If you view a house that clearly has a chimney that is in a poor state of repair, and then decide to buy that house, particularly without a survey, then should that chimney come crashing through your roof three weeks after you bought the house, you have no one else to blame and cannot seek damages from the previous owner.
In the UK, various legislation has been introduced that recognises that in some instances, it is not entirely fair for customers to be solely responsible for the products and services they buy. These laws allow them to return goods, be protected if the goods have been misrepresented and in some cases even receive compensation.
Many areas have seen the introduction of a Regulator who sets the standards and principles for the sector they control. To underpin this, an Ombudsman for the sector acts as a fair and impartial mediator between the customer and a business. While they are entirely separate from the Regulator, their decisions should reflect standards, principles and outcomes expected by the Regulator.
All of these protections are put in place to protect customers from instances where a provider may either provide poor, faulty, misleading or in some other way defective product and service and where it cannot be judged fair to expect the customer to either be aware or fully responsible.
But want happens when the customer clearly wants the product and service they have asked for – is it right that they should have the same protection then ?
As an example after conducting their own research a customer telephones an electricity supplier and requests their most expensive tariff. After being presented with cheaper alternatives, the customer still insists they have the most expensive tariff. Is it therefore right that they can go back to the company after 5 years of being on the tariff and claim a refund and compensation as cheaper rates were available ?
Caveat emptor would suggest no, however an Ombudsman may take a different view. If the Ombudsman felt that the customer was not sufficiently sophisticated to understand all the various issues, and likewise the supplier did not sufficiently exercise a duty of care in ensuring the customer understood the implications of their decision, then it is possible that the Ombudsman could make an award in favour of the customer.
The challenge facing the Ombudsman in such a case is, was the customer really that unsophisticated or are they just being fickle.
There is a situation currently in the Financial Service industry which is bringing into play the rights of customers to make their own financial decisions, the regulatory need to protect them, the UK law and tax system, a company’s right to trade and a bit of caveat emptor for good measure.
A number of unregulated companies have started to trade in the pension arena. Unregulated means that these companies are not controlled by the Regulator and any customer using them has no protection from the regulator or ombudsman. Some of these companies are a front for criminals and the Police have already prosecuted many, others are setup by companies who don’t want to be bound by the rules and regulations that all other financial services companies are bound by.
The main purpose of these companies is to release a pension lump sum from a customer pension fund, typically before the current legal minimum age of 55. While most people would say why on earth would somebody want to deal with a company like that, those desperate to get their hands on money they cannot legitimately get by any other means may feel it is a risk worth taking.
The Financial Ombudsman is currently investigating eight cases where customers have requested their regulated pension fund is transferred to one of these unregulated providers, and the existing regulated pension provider is refusing the transfer.
While we are not privy to the arguments being put forward, we would assume that one of the points the regulated provider is making is that the receiving pension fund has to be recognised and approved by Her Majesty’s Revenue and Customs (HMRC). This is because the ceding fund includes tax reliefs which bind the customer to using the fund in line with HMRC rules. There has been an understanding that money in an HMRC approved pension scheme can only be transferred to another HMRC approved pension scheme.
They would have no issue in transferring a fund to a UK regulated income drawdown provider as an example.
The customer no doubt is saying it is their money and they should be allowed to use it as they wish.
Ironically, and perhaps most importantly, the Ombudsman has one complaint from customer who is saying that his pension fund should not have been transferred to an unregulated provider, even though they would have originally requested this. Of course it is not the unregulated provider who can be investigated by or be the subject of a complaint to the Ombudsman. They have therefore complained about their original pension provider.
Again while we don’t know, we suspect this customer has just realised how expensive and poor these unregulated schemes are, and they may have also picked up an unexpected 40% tax bill from HMRC.
It is illegal to offer pension services in the UK if you are not regulated, so many of the unregulated companies base themselves offshore.
So in the light of all this, what should the Ombudsman decide ?
Well the Ombudsman is being decidedly cagey about how it will communicate its decision. A report in MoneyMarketing (3 October 2013) suggested that when the Ombudsman makes its decision it won’t be one that gives a clear guidance for the future. “The Ombudsman has made it clear that it will not be making it easy for the industry on this”. Proper UK regulated companies will still not be clear if they should transfer or stick. From our perspective this seems decidedly odd and seems to put an even greater burden and risk on legitimate regulated businesses and its customers, while ignoring the risk to customers from unregulated fraudsters.
While it is absolutely true that the Ombudsman must judge all future complaints solely on it merits, this attempt to make a decision while still sitting on the fence will be one the public may find hard to understand.
What about caveat emptor and the clients wish to choose ?
While we can very much understand a customer’s wish to take a pension lump sum early, we think it is the role of the Ombudsman to uphold the wishes and authority of the Regulator and the legitimacy of the UK financial services industry, not forgetting its role to ensure fair treatment of customers. It has no obligation or requirement to be fair to or seek to protect unregulated companies. To that end it needs to uphold the long established principle that transfers of pension funds in the UK can only take place between HMRC authorised schemes. The customer should be able to choose what they want, but within the limits of the laws and tax regime that binds us all.
We can only believe that at some level the Ombudsman fears it can be held liable by these unregulated companies for loss of business or in some other way doesn’t have the confidence to be a leader in righting a considerable wrong.
If the Ombudsman does sit on the fence on this issue, then it will be back to Government to add a further level of legislation, but is that really required when the industry, regulator, HMRC, police and we suspect the Ombudsman know full well that the activity of these unregulated companies is clearly wrong.
If nobody is prepared to act, then why should some companies be bound by layers of regulation, consumer protection laws, the risk of fines etc, while other companies will simply rely on caveat emptor !!