Red Books

The FCA is clearing its desks before Christmas

2 years ago

In the last month we have had three important papers from Stratford. The first was a consultation paper – ‘Improving outcomes in non-workplace pensions’. The second was a final set of rules on how providers have to nudge all clients aged 50 or older taking benefits or transferring towards guidance, even if they have already taken advice. And the final FCA paper is a humdinger – 243 pages consulting on the introduction of a new consumer duty.

I want to cover the first of these papers. This consultation paper has been a long time coming. It’s now over two years since the FCA published its feedback statement on a previous discussion paper and consulted on further aspects. The delay in the consulted rules is no doubt partly down to the effect of the pandemic. But it could have also been delayed whilst the FCA judged how the implementation of investment pathways had gone. I like to also think the FCA has been in listening mode and has been thinking through its approach.

Although the headline target market may be non-advised clients for these proposals, it would be a mistake to dismiss this as not relevant to advisers or their clients. Instead, its repercussions will be felt wider.

There are two main proposals. The aim of the first is to help non-advised customers choose appropriate investments. When non-advised customers first set up a pension, or first pay in a contribution, the provider has to offer them a default option, and that fund should be part of any menu of investments. The FCA want non-advised customers to be reminded of the default option and to be able to select it easily.

The second proposal is to send a warning to customers who have more than 25% of their non-workplace pension assets invested in cash for more than six months. The FCA proposes this should cover advised and non-advised customers. It explains that while the proportion of advised customers holding cash was lower than non-advised customers, for some providers it was still a significant number. The FCA argues some of these customers may have received transactional advice to set up a non-workplace pension but no further advice on their non-workplace investments. And although they considered exempting those clients who were receiving ongoing advice, they have chosen to drop this idea as it added too much complication.

After being bitten quite badly by the prescriptive investment pathways rules for decumulation, these new proposals certainly represent a lesser evil. They allow more flexibility for providers to implement.

It would be remiss to look at these proposals on their own, without taking a step back and exploring how they sit alongside the FCA’s other plans.

The proposals to introduce a new consumer duty are significant and will have a far-reaching effect on all areas of financial services. The FCA wants a higher level of consumer protection and consistent good practice by firms. Within this framework it makes sense that not allowing customers to sit in cash for significant periods is ‘good practice’. It makes me question whether detailed regulations are needed. A simpler approach may be better. By making holding excessive cash a Key Performance Indicator (KPI), the FCA can then monitor providers and ensure firms (both providers and advisers) are taking action to stop this.

In looking at the wider landscape we should also draw in proposals due early next year covering how providers can help stocks and shares ISA account holders make better investment decisions.

We need to look at the whole landscape of how customers make investment decisions and how they can get advice and guidance in doing so. If they don’t have an adviser, then I believe there is a need for providers to play a bigger role in guidance and helping people navigate this maze. Providers have the knowledge, the opportunity, and the relationship. It’s just the fear of straying into giving advice that prevents many offering more help.

It makes sense the approach taken to guide the platform customer on investment decisions is the same whether they have a pension or an ISA. Otherwise, it is going to make no sense to them if they are presented with a single default fund for their pension and are given guidance to choose from a range of funds for their ISA.

A consolidated approach to both these areas makes sense. We need to do what the FCA urges – walk in our customers’ shoes.

The FCA is hard at work in several areas. All may have laudable aims. But someone needs to step back and look at the bigger picture. Otherwise, we risk one arm of the FCA contradicting the other.

This article was previously published by Money Marketing

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Rachel Vahey
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Rachel Vahey

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Head of Public Policy

Rachel is Head of Public Policy helping financial advisers and planners understand the changing pensions and savings environment, as well as how new legislation and regulation affects them and their clients. She’s well known within the pensions and savings industry, and regularly speaks at AJ Bell events, alongside writing content and articles for our website.

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