FCA must re-think investment pathways ‘long-term income’ option

Tom Ellis reports

In response to the news that the Financial Conduct Authority (FCA) may delay the introduction of investment pathways for non-advised clients due to the coronavirus, EValue’s Chet Velani has implored the regulator to take this time to rethink one of the options for consumers.

Investment pathways were introduced as part of the Retirement Outcomes Review policy statement and have been described by the regulator as a “significant intervention” that will help non-advised consumers entering drawdown to make investment decisions that meet their income needs in retirement. The options are:

1. I have no plans to touch my money in the next 5 years

2. I plan to use my money to set up a guaranteed income (annuity) within the next 5 years

3. I plan to start taking my money as a long-term income within the next 5 years

4. I plan to take out all my money within the next 5 years

With the possible delay to the implementation recently revealed by the regulator, EValue, which offers a white-labelled choice architecture solution for investment pathways, is calling on the FCA to re-think pathway option 3 that deals with long-term income.

The fintech firm says the option falls far short of what is required as it omits expectation of sustainable income and how this might vary with investment outcomes. What is needed, it argues, is not just setting this expectation at the outset but also at regular updates.

EValue executive director Chet Velani said the requirement for investment pathway 3 was inadequate: “In our response to the regulator’s first consultation, we argued that it was essential to provide consumers using pathway three with a realistic expectation of the sustainable income that could be supported by the investment strategy adopted for the pathway.

“Without such information, they are completely in the dark and it would be hardly surprising if they succumbed to wishful thinking and withdrew from their drawdown accounts what they believe they need to maintain their desired lifestyle in retirement. The level of income withdrawn has a significant bearing on risk. High income withdrawals from a low risk investment can transform it into a high-risk strategy.”

In the event of dramatic market falls, Velani added, it is likely non-advised investors would not know how to respond and would likely carry on drawing the income they thought they needed.

He continued: “This would result in irreparable damage to their retirement prospects and they would face running out of money early in their retirement. This was exactly what happened with Barclays customers when investors in its two income funds discovered that their funds had been severely eroded after the 2008 financial crisis. The FSA (as it was then) fined Barclays heavily and it was made to pay compensation of nearly £60 million.”