The Financial Services Authority has published the details of its proposed regulatory regime for stakeholder pensions. Consultation Paper CP61 "The Regulation of Stakeholder Pensions" can be downloaded from the FSA website. It does not take into account the Treasury's IPA (Individual Pension Account) proposals.

According to this CP, the majority of commentators on the initial (May 2000) Discussion Paper "accepted that our proposals for the design, content and use of the decision trees were a reasonable response within the constraints set by the government's design of SHPs". Some improvements have been made, but many other important issues have not been addressed; for example, the need to clarify whether the reference in the decision trees for employed persons to "company pension scheme" includes GPPs.

The decision trees are to be published (in both static and interactive form) on the FSA website at the end of 2000 and will be prescribed by the FSA and made part of (or to accompany) the key features document. It should be especially noted that the decision trees are not confined to the flow charts: the prescribed introductory notes are also included.

In summarising comments received from 74 organisations and individuals on the initial Discussion Paper, FSA notes tellingly that "on the length and scope of the introductory notes opinion was evenly divided. Some felt consumers needed more information, others that the introduction was too long and would turn consumers off. Both these perceptions are surely accurate. In response, the CP states "we have confined ourselves to explaining, in general terms, the relevance of the MIG [Minimum Income Guarantee; many commentators noted the inadequate attention paid to this in the Discussion Paper] to deciding whether to buy a SHP . . . a new section on affordability . . . and sharpened the reference to SERPS as an important factor in qualifying for the MIG."

When being taken through the trees over the telephone, which may be done by a person who is not a qualified adviser, the consumer will have to have a copy of the trees in front of them. This is only sensible. However, since it is wholly impractical to imagine that the call centre employee will read out the prescribed introductory notes - a process which would take at least 15 - 20 minutes - it ought to be a requirement to first obtain and record confirmation from the individual that he or she has in fact actually read them. Unfortunately no such requirement features in the CP.

In reaffirming its intention to allow unqualified persons to deal with potential stakeholder purchasers - "a key element of our proposed regulatory regime", it admits - the FSA continues to assume that information can be successfully separated from advice - in the teeth of much advice from the industry to the contrary. The only safe strategy for these unqualified persons will be to refuse to answer almost any question or request for clarification, which will lead either to supervisors, ie qualified advisers - where available - very frequently being brought into the consultation. This outcome will increase costs and indirectly imperil the success of SHPs.

The CP itself recognises that "high standards of supervision" will be necessary. However, in practice, it seems very likely that to avoid either an unacceptable increase in supervisory costs or an unacceptably low conversion rate, advice will be provided by unauthorised persons: knowingly or otherwise. The outcome of the consultation, including a copy of the route taken through the trees, will have to be confirmed in writing. This is unlikely to document any such advice.

According to data supplied by respondents to the Discussion paper, half of the 2 million SHPs expected to be sold each year will be through workplace marketing (700,000 including the use of decision trees). The CP considers whether worksite presentations should be restricted to qualified advisers. Although acknowledging that this would be well worthwhile if it reduced the incidence of mis-buying a SHP by "even a tiny fraction of the target group" - arguably one of the easier targets to hit - and despite estimating the cost at just £1 per SHP sold, the FSA cops out by asserting that "data is hard to come by to support the argument one way or the other".

We suggest common sense dictates that workplace presentations should be given only by qualified advisers. As the CP itself states, advisers who were subject to the detailed training and competence requirements "would be more accustomed to acknowledging where the boundary lies between information and advice . . and more experienced in giving balanced presentations to large groups of people, each of whose personal circumstances and financial needs would be significantly different."

Additionally, and despite a negligible response to the original proposal in the Discussion Paper, the FSA is still keen to know whether we think it is practicable to permit unqualified persons to take consumers through the decision trees in any other situation away from a provider's premises (where a "controlled environment" will be assumed). We suggest the answer should be given loud and clear: 'NO'.

The FSA estimates that if advisers had to be used instead of decision trees, total annual sales of SHPs would be reduced by 10% (or 200,000 policies). Whether this estimate amounts to a "significant" reduction, as the FSA claims, must be very debatable. Where SHPs are sold on an advised basis, there will be no change to the existing regulatory requirements. Where there is an advised recommendation to buy a "traditional personal pension" - or in some cases, an FSAVC - instead of a SHP, a "suitability" (ie 'reason why') letter will have to be provided.

OPAS has been contracted by FSA to provide a SHP helpline from October 2000 - December 2001. One may reasonably imagine their experience will parallel that of the TUC's pensions helpline experiment last year, when it was deluged with callers. This SHP helpline will give information and guidance, but not advice.

Consumer education ranks high on the FSA's list of regulatory tools for reducing the risks associated with the introduction of SHPs. In addition to publishing consumer guides on pension options for distribution via Consumer Advice Bureaux and similar outlets, the FSA also intends to launch a new web-based consumer learning programme at the end of 2000. This will cover pensions within the wider world of financial planning, which is to be welcomed. Given the crucial role of the FSA's consumer education programme, we feel the FSA would be wise to subject this programme itself to a risk analysis assessment.

The CP recognises the "significant advantages" of a screen-based implementation of the decision trees. In such, only relevant questions and responses are presented; additional information can readily be provided (eg via 'Help' boxes); and the consultation can easily be recorded. Firms will however be "required to use the prescribed design and content when publishing electronic versions of the decisions trees." The FSA appears to have no plans to publish such a version itself.

An important lesson the FSA has learned is that the decision whether to contract out is too complex to be dealt with by the trees. The relevant tree has been removed and it is now proposed to cover contracting-out in the introductory notes "so far as it is necessary to do so in the context of the decision trees" - which turns out to mean merely "a description of the issues". Given the government's expectation that the majority of the target market for SHPs will contract out, we believe the contracting-out decision should be seen as an essential part of the SHP buying process, and therefore ideally should be fully supported by the information in the decision tree document.

However, the FSA has decided that the contracting-out decision could not be adequately covered in the notes and proposes instead, rather vaguely, that "firms wishing to suggest or recommend contracting-out to SHP customers will need to develop their own systems for doing so". The CP notes that "several respondents [to the Discussion Paper] felt the complexities associated with the decision to contract out of SERPS were such that personalised comparisons with State benefits were likely to remain essential."

The FSA's cost analysis does not appear to take any of this into account. Overall, there must be a grave objective doubt about whether the target SHP take-up rate can be achieved without breaching regulatory requirements or involving a significant increase in total costs. We do not believe it can.

If a consumer uses the decision trees, the CP stresses that the onus of responsibility for any decision made rests with the consumer, provided their attention is drawn to the need to take advice at every appropriate point. The confirmatory letter will state that no advice has been given or recommendation made. "The decision trees are not a 'pensions planner'", says the FSA, just "a simple tool to use when considering whether a SHP would be a good choice". Despite this, the FSA considers that the more proactive approach it intends to take to regulation will "ensure that, overall, consumers are no less well protected through using the decision trees."

Already the first amendments to the DSS Stakeholder Regulations (SI 2000/1403) are on the horizon. The CP discloses that the DSS might amend the Regs to "ensure that members of trust-based SHPs receive key features information, including decision trees, and have the same cancellation rights as members of contract-based SHPs."

SHPs are to be treated as a 'packaged product' ie regulated on the same basis as life policies (including personal pensions), units in regulated collective investment schemes and investment trust savings schemes, whether or not held in a PEP or an ISA.

Intending SHP providers will be required to show they have sufficient capital reserves to cover the first three years losses, not just the first 12 months, and if they expect losses to continue beyond the first three years, to explain how they intend to meet the minimum financial resource requirements. Life companies, however, must provide in full for 'future expenses'. One of the 26 questions posed by the CP asks "Is this regime likely to restrict entry by life insurance companies to the SHP market?" The answer must surely be 'yes'. Deep pockets indeed will be required.

It is intended that the proposals in this Consultation Paper will come into force on the same day as the Financial Services and Markets Act (a date referred to as "N2"), which the Treasury announced on 18 July would be "in about a year's time".