Many consumers struggle to make critical decisions about saving, investing and accessing their pensions. These are complex decisions in unfamiliar territory for most people. As a result, they underestimate how much they need to save, how their pensions would look in the future, do not take advice and guidance when accessing their pensions and often do not have a plan for managing their pension pots. Providers have long been making the case that consumers need more support, but their hands are tied due to strict advice rules. The FCA’s recent announcement to carry out a holistic review of the rules is a first step in making advice rules deliver to those less well-off and less engaged.
Advice rules that permit providers to steer their customers in the right direction could deliver better outcomes. Any guidance that is tailored to a particular individual, based on their preferences, needs or circumstances, can be interpreted as a personal recommendation and therefore, be legally classed as advice, which comes with a higher regulatory bar. So providers (and employers, trustees and the Money and Pensions Service) often stop short of what they know would help customers.
For instance, if advice rules were more flexible to accommodate consumer needs, providers could do more to encourage their customers to save and invest enough to give them the level of retirement they desire, using information they have about the customer. They could also be more comfortable in using rules of thumb to guide customers to a sustainable retirement income based only on that pension.
They would also be able to steer consumers away from bad outcomes. For example, providers could encourage savers to diversify their investments when they have too much invested in a just a few stocks, or in cash. This is the focus of the FCA’s expected work on ISAs, but it also applies to other pensions and investments.
A further topical example is that since annuity rates are higher than they have been for years, firms could identify customers invested in cash or bonds and suggest they use some of it to secure a guaranteed income. This illustrates that specific, case-by-case scenarios are not sufficient, as new scenarios will always arise – so a broader intervention is needed.
The FCA’s new Consumer Duty sets higher and clearer standards for consumer protection and is meant to encourage exactly this sort of approach from providers. As Sheldon Mills, FCA’s Executive Director, Consumers and Competition, put it in a recent speech, it “means putting customers in a position where they can make informed decisions; where they are presented with suitable products and services for their individual needs; and where they receive fair value for those purchases.” This aligns perfectly with what providers have been saying they would like to do, but are not permitted by the strict advice rules.
The Consumer Duty, which also covers some services to occupational pension schemes, now requires providers to avoid causing foreseeable harm and to enable and support customers to pursue their financial objectives. Providers see this legal requirement conflicting with the advice boundary, with the Consumer Duty asking them to cross the boundary, and the advice rules making it legally impossible and reputationally dangerous to do so.
Providers have tried for years to secure clarifications and assurances from the FCA on specific areas of the guidance that implement the advice rules. However, a major stumbling block has been MiFID, the EU legislation that the guidance is based on and the seemingly impossible task of departing from it. With much of EU legislation now being rethought, advice rules need to change, expanding the boundaries of guidance to allow those less well-off to get the support needed to achieve better outcomes.
The FCA’s announcement that it will carry out a holistic review into advice and guidance is encouraging. The new regime should work across the board, around different product types, whether it is about decisions made during saving and investment, during retirement and in later life as well as in the transitional period in between.
Flagging to consumers how far from or close to achieving their financial objectives they are based on their financial patterns or their investments should not be as high a regulatory bar is it is now. Based on their experiences in a wide range of retail markets, consumers expect and benefit from personalised nudges to help them make decisions. The potential of technology to deliver this – including new forms of advice – is huge. As Sarah Pritchard said, the “weight of regulation should be commensurate with the level of risk”.
Moreover, when it comes to risk, the FCA should bear in mind that doing nothing, not being able to give any guidance when a customer is making choices that are likely to affect them negatively, is also a risk and an increasing one with the growing number of DC pensions and hundreds of thousands of people accessing them each year.
The long-awaited review is a great opportunity to ensure firms are not only free, but also encouraged, to support customers and innovate in the area of information and guidance to help consumers achieve better outcomes.