Rules and regulations falling short on consumer understanding

If I was to do a word-cloud covering what had been written about the FCA’s new rules on consumer duty, there is no doubt ‘ground-breaking’ and ‘seismic’ would feature large.

This set of regulations demand financial services firms stop and think about the consequences of all their interactions with their consumers and ensure good outcomes in four areas – governance of products and services, price and value, customer support, and consumer understanding.

This should result in a step change in the quality of consumer experience of financial services.

However, such a transformation is only possible if the rule makers also take a good hard look at the rules and regulations they put in place and apply the same tests.

Taking a glance at the pension rules, there are at least three topical areas where regulations and rules could or do fall short of the consumer understanding check:

1. Three annual allowances

‘How much money can I tax-efficiently invest in a pension?’ should be a simple question to answer. But it’s not. As well as the standard annual allowance of £40,000, firms have to explain how the customer’s level of UK relevant earnings – and whatever income they are made up from – could restrict tax relief. And that’s before the areas of tapered annual allowance and money purchase annual allowance are covered.

How much easier to understand would it be to only have one single annual allowance for defined contribution pension savers. And a lifetime allowance only for defined benefit scheme members.

2. Investment pathways for platform pensions

The problem with investment pathways regulations is that they do not fit into the world of platform pensions and therefore don’t make a lot of sense to these types of savers. The regulations are written in such a way that doesn’t allow wriggle room on the content and timing of the messages that providers have to give.

When the pension investor requests tax-free cash and/or income, they are bombarded with messages about investment. At that moment all they are bothered about is the money being paid into their bank account. It would be far more effective if once payments had been made, providers then engaged savers about making good investment choices with their remaining pot.

3. Growth projections based on volatility

The Financial Reporting Council (FRC) is currently proposing changes to the growth rate assumptions for projections of future pension pots and retirement income for both annual statements and the pensions dashboards. It wants to base this on the volatility of each separate investment held in the pension pot. Try explaining that succinctly and easily to customers.

Projections are just best guesses. Investors don’t need an exact number; they need an indication of what could happen. After all, there are so many things that will change after the date of projection – such as contribution rates and patterns, retirement age, or investment strategy, to name but three.

Keep it simple. Instead of using rates based on volatility just assume a simple single rate for the pot. The projection will end up in the same ballpark, and people will understand how it has been calculated.

Good consumer understanding is vital. Giving consumers the information they need, at the right time, and presented in a way they can understand is the bedrock to them making better financial decisions, and ultimately achieving a better financial life.

Firms embedding the consumer duty into their activity is only half the story. To truly get ground-breaking change, the rule makers also need to walk the walk, and fully adopt these principles.

This article was previously published by FT Adviser