Right at the end of January, the FCA went live with its latest consultation paper linked to its ongoing Retirement Outcomes Review (ROR) which was born out of the Retirement Income Market Study published way back in March 2015. Back at the beginning of ROR, its four key areas of focus were:
* Shopping around and switching: The FCA is exploring the extent to which consumers can compare the larger range of products and options available to them from age 55 post-pensions freedom. Can they compare products easily, shop around, switch providers when they are not being offered what they want and make sound informed decisions?
* Non-advised customer journeys: The FCA is probing whether in a more complex decumulation decision-making environment – and one in which people are much less likely to have regulated advice today – are consumer journeys to decumulation offerings smooth or is the increased complexity they are confronted with causing them “not to engage or leading them towards certain products, choices and decisions”?
* Business models and barriers to entry: As providers adapt to the changes, the FCA is exploring what business models and products are emerging and what risks these might pose in terms of reduced competition in the market. How might firms’ business models impact on consumer engagement and switching, and are there barriers to entry to challenger firms?
* Impact of regulation on retirement outcomes: Are there examples where FCA regulation is overly burdensome and may be inadvertently contributing to barriers to entry or preventing useful product innovation by firms?
The latest 116-page ROR instalment – or to give it its official moniker, Consultation Paper 19/5 – focuses principally on the second point above. Even more specifically, it looks at non-advised income drawdown (IDD) policies and the fact that too many IDD policy holders are leaving their savings in cash, regardless of how long they intend to keep the money there for.
Readers could be forgiven for thinking the FCA has been studying the best of what goes on in adviser-land, and then seeking to incorporate the same into the DIY space. Rather than asking customers to pick a fund from the list of those available, as execution only platforms tend to do, the FCA wants customers to think about and set out their plans for at least the next five years.
The essence of the FCA’s recommendation is that providers of IDD policies should offer a range of prescribed investment pathways for non-advised drawdown customers under which the provider has picked a fund mix that is suitable for the customer’s intended patterns of drawdown. This must sound terribly familiar to advisers – ‘Don’t start with a star fund manager; start by helping the customer to work out where they want to go’ is the message here.
The recommendation flowed from the FCA’s own research, which found too many consumers were motivated purely by the desire to get hold of their 25% tax free cash as quickly as possible – and, in so doing, paying scant attention to the remaining 75% of retirement savings often left in drawdown pots.
In fact, they found that one in three consumers who had gone into drawdown post-pension freedom were completely unaware of where and how their remaining money was invested. Nearly one in five of non-advised ‘drawdowners’ held inside SIPPs (18%) had 80% or more of their drawdown pot held in cash.
This situation appears to have been made worse by the fact that many providers are defaulting non-advised drawdown policyholders into cash or cash-like assets. Going forward, if customers want to keep their assets in cash, they must make an active decision to do so.
Large IDD policy providers should be required to offer single investment solutions that correspond to a range of objectives; while smaller providers (those with less than 500 non-advised new drawdown customers each year) will be able to refer consumers to a drawdown comparator tool to be provided by the new Single Financial Guidance Body.
The finalised handbook text and policy statement linked to these new investment pathways will be issued in July 2019 and all these changes will have to be implemented within a year of the policy statement’s publication. So, what might the FCA-prescribed investment pathways look like come July 2020? Providers must offer one investment solution for each of the following objectives:
* Option 1: I have no plans to touch my money 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 of my money within the next five years.
The FCA will insist that, when a consumer has picked one of these options, but not purchased the investment recommendation, they must be prompted to do so again or directed to seek advice or guidance.
The existing regime of ‘independent governance committees’ will be extended to provide oversight of these investment pathways. Again, I see the FCA taking a leaf out of the adviser space, where it is becoming increasingly common for IFA businesses to turn to external professionals for help in building model portfolios.
In addition, the FCA is proposing an additional ‘five-year anniversary’ statement should be added into the annual statement immediately before the customer reaches that five-year anniversary of selecting a specific investment pathway. This should be in the form an “enhanced prompt to review their investment decision.”
The paper even addresses how customers going into ‘drip-feed drawdown’ need to select investment pathways appropriate to them. A consumer may, for example, select an investment pathway and take only part of their tax-free cash entitlement without agreeing with their provider how they want to take tax-free cash and move funds into drawdown in the future. In these cases, the FCA proposes consumers must undertake the full investment pathway selection process on each occasion they subsequently move funds into drawdown.
Good ideas and best practice can flow both ways in financial services. It would make a good deal of sense for advice firms to consider whether some of the new rules about to be imposed on providers might help them to segment their own customers with retirement savings in drawdown.
If the FCA can receive data from execution-only shops about how many customers they have in each of the four profiles set out above, they may expect advisers to have command of those sort of client numbers too. And with the FCA mandating the investment pathways must also include a report on Environmental, Social and Governance (ESG) considerations, perhaps advisers should get ahead of the game by providing regular ESG reports to all clients.
Finally, my enthusiasm for CP 19/5 was diminished somewhat by the section on value for money. The FCA wants the investment pathways to offer value for money and expects providers to challenge themselves on charges using 0.75% a year as a benchmark.
Is this a touch of the old ‘Sir Humphrey’ attitude from the BBC sitcom Yes Minister? Because value for money is difficult to measure, let’s suggest measuring something different like charges, that accountants can easily add up …
Adrian Boulding is director of retirement strategy of Dunstan Thomas