In the flurry of Financial Conduct Authority (FCA) activity during high summer we saw papers on defined benefit (DB) transfers, non-workplace pensions, and confirmation of the rules relating to investment pathways for drawdown clients.
However, we are still awaiting the outcome of the regulator’s consultation on extending the remit of independent governance committees (IGCs).
This paper has had fewer headlines but could still have a big impact if the rules come into force as proposed. We have been promised the policy statement this quarter, and at the halfway point I’m hoping this isn’t left until a New Year’s Eve big bang.
The proposed rules make IGCs a requirement for any provider offering the investment pathways, with the remit of assessing value for money. This includes any firm that doesn’t meet the small firm exemption – so those who don’t offer their own pathways, and instead use those of another firm.
While the ethos behind this is commendable, it is not difficult to see that there are many cases where the numbers just don’t stack up.
The small firm exemption applies to providers that have fewer than 500 non-advised customers designating to drawdown each year, but those not exempt won’t see all 500+ customers wanting to use investment pathways.
In the self-invested personal pension (SIPP) world these will generally be customers that have actively sought out their provider and are used to making investment decisions – something they are unlikely to want to stop doing just to access tax-free cash. So we could end up with a requirement for an IGC for a handful of customers using pathways.
We know from PS19/21 that advisers will also have to consider the pathways whenever making a recommendation to a drawdown client. Although providers that only have advised customers don’t have to offer pathways, those that do will still be required to have an IGC, and the FCA are of the view that advised customers in pathway solutions will also benefit from the protection of the IGC.
It is when we look at the figures in the paper that alarm bells start ringing. The FCA estimates the cost to a firm offering pathways to establish an IGC to be in the region of £300,000-£600,000 with ongoing costs thereafter of £350,000-£500,000 per year. Smaller firms are allowed a governance advisory arrangement (GAA) as a cheaper alternative, but the guidance suggests these would not be appropriate for any firm manufacturing their own pathway solutions.
Even these come in at up to £42,500 to establish and ongoing costs of £65,000-£85,000. These are potentially huge costs in relation to what could be a handful of customers.
The paper acknowledges that this cost may pass through to consumers – both advised and not – but have stated that all should benefit from the protection offered.
In the paper’s conclusion, the value is assessed as more than 1 basis point of total AUM in workplace pensions and future pathway solutions.
I think in reality it’s very difficult to assess what the take up of pathways will be, and that there will be a huge discrepancy in the value for money the IGC/GAA itself can offer based on the size of the provider and the number of customers involved. Assessing value in relation to the AUM in the whole market is not an appropriate measure.
Let’s just hope the policy statement’s out in time for Christmas and presents us with a more measured approach than the proposals.
Lisa Webster is senior technical consultant at AJ Bell