A full list of conclusions and recommendations appears on pages 91-97 of the report. Some of the recommendations include:
On pensions reform
The Committee notes that all witnesses welcomed the greater flexibility and choice provided by the Government’s proposed pension reforms. (paragraph 118)
Consumers will need considerable support in navigating a market which is undergoing major change and in which consumers are likely to be offered an array of new products. The Committee recommends that the proposed guidance under the guarantee observe the following principles. It should:
- Be demonstrably impartial as to providers and type of product
- Include at least an initial opportunity for face-to-face guidance
- Be free at the point of use, with the costs of such provision made transparent
- Make clear to every consumer exactly what is being offered, the limitations of the guidance, and what protection it gives consumers in the event of detriment
- Be offered from at least 12 months in advance of the consumer’s stated retirement date
- Be co-ordinated with Government-sponsored guidance relating to long-term care (paragraph 186)
“Everyone we spoke to welcomed the pensions and savings reforms announced in the Budget, in particular the greater flexibility and choice that they offer to consumers.
The ‘guidance guarantee’, announced at the Budget, is an important part of making sure that consumers benefit from increased choice. We will measure the Government’s proposals for the guidance guarantee against a set of principles to ensure their effectiveness.”
On new pensions products, and the role of the FCA
The market is likely to adapt, offering a new range of financial products for those approaching retirement. It is crucial that these products are not defective. Were they to be so, the reputation of the financial services industry, which has suffered severe damage in recent years from large scale mis-selling, would be further tarnished. (paragraph 144)
The FCA has now been given new powers to intervene early, in advance of detriment occurring. In practice, this will be extremely difficult to accomplish without creating other forms of consumer detriment. In particular, it will be essential to avoid stifling market innovation. The use of these new powers will be a major test of judgement-based regulation. (paragraph 145)
“The pensions reforms are likely to lead to financial innovation.
That innovation needs to provide products that are in the interests of consumers and which are sold responsibly.
Following the financial crisis, and the mis-selling scandals, the reputation of the industry is under scrutiny.
The FCA, with its new powers of intervention, will also be under the spotlight. This will be an important test of its commitment to develop judgement-led regulation. Consumers will lose from heavy handed regulation or the extension of the box-ticking culture that has bedevilled conduct regulation. This achieved little and often protected nobody. Effective regulations are badly needed, encouraging innovation, but the FCA must also act quickly to bear down on consumer detriment where necessary.”
On the future taxation of savings
Taken together, the changes announced in the Budget to ISAs, as well as the reforms to the taxation of defined contribution pensions at retirement, amount to a substantial increase in the flexibility available to savers. As this flexibility increases, ISAs and pensions will become increasingly interchangeable in their effect. In the light of this, the Committee recommends that the Government set out comprehensively the approach it intends to take to taxation of all forms of saving. This should include an examination of the merits of moving further towards taxing savings once, the scope for bringing closer together the tax treatment of ISAs and pensions, and the appropriateness of the present arrangements for the pension tax free lump sum. (paragraph 205)
“For too long, double taxation has discouraged some forms of saving. These reforms take us towards only taxing savings once.
The Budget has enhanced flexibility for those saving, whether in pensions or ISAs. The Government should now look further ahead. The Mirrlees Review highlighted the complexity and distortions in the UK tax system’s treatment of savings.
The Government now has the opportunity to build on its reforms and the expressions of cross-party support that they have attracted. In particular, there may be scope in the long term for bringing the tax treatment of savings and pensions together to create a ‘single savings’ vehicle that can be used—with additions and withdrawals—throughout working life and retirement. This would be a great prize. The cross-party support for these savings and pensions announcements offers the prospect of a more stable and healthy environment for pension and savings taxation. This can only encourage savings and reduce dependency.”
On HMRC debt recovery powers
The proposal to grant HMRC the power to recover money directly from taxpayers’ bank accounts is of considerable concern to the Committee. It could develop into a return to Crown preference by stealth. The Committee considers a lengthy and full consultation to be essential. The greater detail provided by the Government on 6 May will need further and extensive examination, and the Committee will take further evidence on this. Giving HMRC this power without some form of prior independent oversight—for example by a new ombudsman or tribunal, or through the courts—would be wholly unacceptable. (paragraph 244)
The Chancellor argues that this measure can be justified because the Department for Work and Pensions already has the right to take money directly from people’s bank accounts to pay child maintenance. However, the parallel is not exact: in those cases, DWP is acting as an intermediary between two individuals. HMRC would be acting not as an intermediary between two individuals but rather in pursuit of its own objective of bringing in revenue for the Exchequer. (paragraph 245)
This policy is highly dependent on HMRC’s ability accurately to determine which taxpayers owe money and what amounts they owe, an ability not always demonstrated in the past. Incorrectly collecting money will result in serious detriment to taxpayers. The Government must consider safeguards, in addition to those set out in the consultation document, to ensure that HMRC cannot act erroneously with impunity. These might include the award of damages in addition to compensation, and disciplinary action in cases of abuse of the power.
The ability directly to have access to millions of taxpayers’ bank accounts raises concerns about the risk of fraud and error, and this should also be covered by the consultation.
Following the merger of HM Customs and Excise and the Inland Revenue in April 2005, an extensive review of HMRC’s powers, deterrents and safeguards was carried out from 2005 to 2012. The Committee believes that sufficient time has now passed to warrant a post-implementation review of these powers. The aim of this review should be to ensure that all the powers HMRC has at its disposal remain relevant and are no more than are sufficient to enable HMRC to achieve its objectives. (paragraph 248)
“The proposal to grant the power to HMRC to take money directly from people’s bank accounts is very concerning.
People should pay the right amount of tax. But HMRC does not always ask for the right amount.
Some taxpayers may find money taken from their accounts that later should be paid back. That would be unacceptable.
Exceptional powers such as this require prior independent oversight. The Government must demonstrate that it has dealt with the Committee’s concerns before proceeding.
The Committee intends to take evidence from HMRC on this, among other issues, shortly.”
House price and commercial real estate bubbles are easy to spot in retrospect. The problem for the Financial Policy Committee is to spot them in advance of their bursting and take whatever action is required to mitigate their negative effects on financial stability. (paragraph 54)
Wider economic concerns are the responsibility of the Government and the Monetary Policy Committee. The Government is also responsible for fiscal and policy tools which directly influence the housing market. It should therefore state what indicators it believes are most important in detecting any wider economic risks arising from the housing market. It should also set out how it plans to address these risks, should they arise. (paragraph 55)
“The Committee has expressed concerns about Help to Buy from the time of its announcement at last year’s Budget. The Committee highlighted the risk that the primary effect of the scheme, at least in the short-to-medium term, could be to raise house prices. The Committee has also drawn attention to the risk that withdrawal of Help to Buy may have a distorting effect on the housing market.
The need to address these difficulties places a particular responsibility on the FPC, as well as the Government, for detecting and addressing the financial stability risks arising from the housing market.
Housing bubbles are easy to spot in retrospect. The FPC has been given the challenging role of identifying them in advance.
The Bank of England has been granted a large and varied range of tools to address this type of risk to stability. The FPC will be meeting in June to decide whether any of them should be used. The Committee will take an early opportunity to secure an explanation, both to us and to the wider public, for any decisions taken.
“The FPC and the Bank’s legitimacy can only be enhanced by a wider public understanding of their powers and decisions.”
Retrospective tax legislation conflicts with the principles of tax policy recommended by this Committee. In our Budget 2012 Report we recommended that the Government restrict the use of retrospection to wholly exceptional circumstances. Witnesses told us that the Government was not abiding by this recommendation. Furthermore, the Red Book announced an additional retrospective taxation policy: an extension of the requirement for taxpayers to pay upfront any disputed tax associated with anti-avoidance schemes. This policy will retrospectively apply to some of the 65,000 outstanding tax avoidance cases. There may be a case for this policy but the Government has yet to explain what is wholly exceptional about these cases that justifies this retrospective measure. It should do so in response to this Report. (paragraph 225)
“We have deep reservations about any extension of retrospection in the tax system.
Retrospection runs counter to the Committee’s principles of tax policy. In particular, it undermines certainty. Retrospection should be considered only in wholly exceptional circumstances. The latest measure would have to be justified on those grounds.
Retrospection puts policy on a slippery path to arbitrary taxation, discouraging investment and innovation and creating the scope for great unfairness.”