IT GOES without saying that the financial services industry fully supports the Financial Conduct Authority’s (FCA) objective of securing an appropriate degree of protection for consumers. But, as is often the case, the application of the regulator’s high-level principles can result in situations where complexity and nuance need to be analysed, considered and even challenged.

While the regulatory regime requires all financial services firms to “act honestly, fairly and professionally in accordance with the best interests of its client”, the underlying financial services legislation also requires the regulator to have regard to the general principle that consumers should take responsibility for their decisions. Exactly how the regulator expects pension providers to balance consumer freedom and protection is as clear as mud and is currently dividing opinion within the industry.

It is safe to say that the regulator - and the firms it oversees - continues to grapple with the implications of pension freedoms introduced by then Chancellor George Osborne some four years ago. At the time of announcing these radical changes to the pensions landscape, the Government stated that “individuals who have worked hard and saved responsibly throughout their adult life should be trusted to make their own decisions with their pension savings”.

However, the reforms were counteracted by an important safeguard to protect individuals, in an acknowledgement that the freedoms meant that consumers faced more complicated choices about their pension options.

Primarily, this required an individual to take professional advice from a suitably qualified independent financial adviser in order to transfer from a defined benefit to a defined contribution scheme, a move that is necessary to allow them to access the flexibility of the new pension freedoms regime.

What has now become more evident is that the receiving defined contribution schemes, which are regulated by the FCA, are being held to a higher standard than the transferring defined benefit schemes, which are regulated by the Pensions Regulator.

This has been reinforced by a recent guidance note from the FCA entitled ‘Managing the risks of Defined Benefits to Defined Contribution transfers’. This called for pension product providers to “have appropriate measures in place to ensure that products are being recommended responsibly and appropriately, in accordance with the Treating Customers Fairly Principle”. The FCA also called for pension product providers to ensure that their messages to IFAs put good consumer outcomes at the forefront.

This was interpreted by some firms to mean that a provider had to police the advice given by the financial advisers recommending their pension products. Despite the regulator clarifying that providers are not responsible for the advice three self-invested personal pension firms took the view that the goal posts were being shifted and withdrew from the defined-benefit transfer market in quick succession.

Expectations are, for the moment, open to interpretation. What we need to hope for is that an effective market is maintained for consumers seeking advice in a complex area and that the FCA provides the necessary clarification to the pensions industry.

Digging a bit deeper into this issue and the waters become even muddier in cases where individuals decide to act against the advice given to them - commonly referred to as insistent clients. If you ever needed an example of the regulatory system lagging behind the curve of the pension freedom reforms, you only need to consider that the FCA Handbook does not refer to insistent clients and there are no rules specifically about them.

Simply put, should an individual who wishes to act against the advice given to them be prohibited from a choice that they clearly want to make? If so, in all circumstances?

On the face of it, accepting an insistent client appears somewhat at odds with the overarching regulatory principle that a firm must pay due regard to the interests of its customers and treat them fairly. But then, if it is permitted under legislation it seems odd that the onus is then on product providers to stop the bus if the legislation is delivering poor consumer outcomes.

The reality is even more complex. Often a product provider will have only limited information, compared to what is captured by the financial adviser to assess the suitability of any course of action for the client. Without knowing the client’s objectives, or their wider financial situation, any judgement on whether a good or bad outcome is likely will be turned into a guessing game.

At the moment, it feels like pension providers are having to wrestle with these questions in something of a vacuum, as the regulator slowly forms its own views, often retrospectively.

I am not aware of another industry sector where businesses would be expected to operate under such uncertainty, but that is the issue with principle and outcome-focused regulation: it is open to interpretation.

So where exactly does the balance sit between consumer freedom and protection? I expect that it is yet to be decided by the powers that be.

Lee Halpin is technical director at @sipp.