Gareth James: First steps on drawdown investment pathway

Drawdown investment pathways may have been billed as a non-advised issue but, writes Gareth James, advisers actually need to know the ins and outs of client options

When it comes to bumper days for Financial Conduct Authority (FCA) publications affecting pensions, 30 July 2019 is going to go down as a key date.

It saw the release of three documents which, in different ways, are likely to significantly impact the pensions market in coming years.

Immediate reaction understandably focused on the FCA’s consultation paper CP19/25, which proposes a ban on contingent charging on defined benefit (DB) transfers, except where a few exceptions apply.

The FCA’s feedback statement on workplace pensions FS19/5, hasn’t received the same attention. This is also understandable given the FCA’s work is at a relatively early stage.

After industry feedback has been provided, we can expect a consultation paper and policy statement before the FCA’s proposals see the light of day.

The publication which, arguably, will have the most immediate impact on pensions is the FCA’s policy statement, PS19/21, focusing on drawdown investment pathways.

As a policy statement, the outcomes from this paper will go live more quickly than those from the other papers – in this case from August 2020.

Given that the drawdown investment pathways are being introduced with a view to supporting non-advised customers, some might think that there will be no impact for advisers, but the FCA’s design of the rules means that is not the case. It is the most important adviser impacts of that paper on which this article focuses.

Getting personal

Arguably the biggest ongoing impact will relate to personal recommendations about the investment of funds in a client’s drawdown arrangement. Advisers making those personal recommendations will have to consider pathway investments in their suitability assessment.

This doesn’t just apply at point of entry to drawdown, but whenever personal recommendations are given regarding existing drawdown funds. Pathway investments will primarily be designed and offered by providers of pensions focused on non-advised customers.

However advisers will still have to consider pathways as part of a suitability assessment even when they are using providers which only cater for advised clients and so may not offer pathway investments themselves.

The most significant impact when a client puts some of their pension into drawdown (or transfers an existing drawdown fund to a new provider) is that the provider with whom the drawdown funds will end up will have to establish whether a personal recommendation has been given in relation to the transaction.

If the provider can’t establish this, they will have to offer pathway investments to the client, regardless of the fact that they are aware that the client uses the services of an adviser.

When considering whether a client has received a personal recommendation the provider will not be able to rely on the following:

  • Information that is more than 12 months old;
  • Information that the customer is already in, or transferring from, an advised product. So a client using an advised pension/platform won’t be sufficient by itself to exempt the provider from putting the client through the investment pathway process, further evidence will be required;
  • That adviser charges are being paid to the adviser – this can only qualify if the provider gives the client a reminder that adviser charges will continue to be paid following designation to drawdown/the drawdown transfer before the transaction has completed.

Record keeping requirements

Providers will be required to keep a record of how they determined that a client had received a personal recommendation. In most cases I’d expect providers to meet this requirement by asking the adviser to confirm in writing that a personal recommendation was provided in relation to the transaction.

The obvious implication of this is that, if you as the adviser have not given a personal recommendation in relation to the transaction and so cannot declare that you have – for example if your client has just told you that they wish to put a bit more of their pension into drawdown to access the tax free cash – the provider will be required to take that customer through the whole pathway process, potentially slowing down that client’s access. With that in mind, it is worth advisers familiarising themselves with the pathway process which will need to be followed so that they can manage client expectations.

Smaller drawdown providers, those who place fewer than 500 non-advised customers into drawdown each year, will be exempted from the pathway requirements. But even use of these providers will throw up anomalies where a personal recommendation can’t be evidenced.

Pathway-exempt providers will be required either to refer the customer to whom a personal recommendation has not been given to another provider who offers pathways (yes, the FCA is expecting these pension providers to point a customer to a competitor!), or they will have to point the client to an, as yet unbuilt, drawdown comparison tool which will be offered by the Money and Pensions Service. The provider must use one of these two options. They will not be allowed to ignore these options and simply point the client back to their adviser.

These aren’t the only implications, but they’re the two requiring the greatest consideration. The drawdown investment pathways might have been labelled as a non-advised issue, but it is very clear that advisers won’t be able to ignore them.

Gareth James is head of technical at AJ Bell