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The Financial Conduct Authority’s (FCA’s) Consultation Paper of January 2019 sets out their second proposed package of ‘remedies’ arising from their “Retirement Outcomes Review” (ROR). Within it, they consult on introducing ‘default investment pathways’ for those in drawdown on a non-advised basis, as well as other proposed changes to their rules and guidance. To what extent, however, have they already made up their mind and why is the Paper virtually silent on arguably the best remedy of all – namely, seeking advice?
As you will see from my related blog, the FCA simultaneously issued a Policy Statement and Consultation Paper in January 2019, in response to its Consultation Paper (CP) that accompanied their “Retirement Outcomes Review – Final Report” (ROR) in June 2018.
While my related blog focuses on their Policy Statement, this blog addresses the contents of their January CP. The focus of the ROR are those consumers who choose to draw down their pension funds without taking regulated advice – an expanding cohort that I refer to in this blog as ‘non-advised draw-downers’ (or NADs for short).
"The focus of the ROR are those consumers who choose to draw down their pension funds without taking regulated advice."
The FCA’s overriding concern is that NADs are most at risk of harmful outcomes in retirement - particularly as a sizeable proportion of them are fully invested in cash (or ‘cash-like assets’), even though they do not intend to withdraw their funds in the short term.
Last June’s CP therefore set out the FCA’s proposed ‘remedies’ in response to the ROR’s findings, while January’s CP consults on the three remedies that they raised for discussion last year; namely, investment pathways, ensuring investment in cash is an active choice, as well as actual charges information.
We responded to their latest CP and are now awaiting publication of their final rules during July. Somewhat ominously, 24 pages of draft text for the FCA’s handbook of ‘rules’ are included at the back of the CP, which makes one wonder to what extent responses will be considered, and significant adjustments made to the draft text where appropriate?
The idea behind DIPs is that they would offer NADs a choice of ready-made portfolios of different asset classes, to help meet specific retirement objectives and ensure that drawdown funds did not languish in cash over several years.
Despite our protestations, the FCA has persisted in pursuing the introduction of DIPs across all pension providers in their January CP, save for one concession that “small” SIPP providers with under 500 non-advised customers going into drawdown each year will not be compelled to offer DIPs within their product proposition, if and until that number is exceeded.
If this remedy becomes mandatory, providers will have to offer a different multi-asset investment pathway for each of the following four retirement objectives that a NAD can choose from.
- Option 1: “I have no plans to touch my money [i.e. drawdown fund] for the next five years.”
- Option 2: “I plan to use my money to secure a guaranteed income within the next five years.”
- Option 3: “I plan to start taking my money as a long-term income within the next five years.”
- Option 4: “I plan to take out all my money within the next five years.”
Given the scale of the potential changes proposed within the CP, we believe that the FCA should publish its findings after the changes have been implemented, in order to determine whether the anticipated benefits have been realised; i.e. not just because of the scale, but because it demonstrates good practice and should lead to better regulation in future.
In addition, the FCA should be more explicit in demonstrating how it has analysed the responses it receives to the CP and build this into their final Policy Statement that is due in July. Including pages of draft handbook text at the back of the CP suggests – rightly or not - that their mind is already made up and that the consultation process is nothing more than paying ‘lip service’ to pension providers.
A significant proportion of the benefits currently attributable to DIPs could be achieved by simply prohibiting the ability to use cash as a default investment option. We firmly believe that there is merit in making this change in isolation firstly and then assessing its impact before proceeding with investment pathways.
Importantly, NADs may not appreciate that DIPs do not offer active oversight of performance on an individual basis as a financial adviser would provide and that the ‘commoditised’ and uniform presentation of DIPs across providers could lead to consumers failing to understand the investment risk of the proposition they’ve opted for.
In summary, there are positive points to be taken from the proposed remedies within the FCA’s CP. Arguably, however, the best remedy of all would be for those currently in drawdown on a non-advised basis to receive regulated financial advice. This is an obvious solution that, somewhat puzzlingly, only attracts scant attention within the document itself.