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Design flaws: FCA second line of defence reforms risk ‘overloading’ customers

Providers under pressure to comply with the FCA’s new ‘second line of defence’ rules may end up overloading customers with generic information to meet the April deadline, experts are warning.

Last week, the regulator published rules that require pension providers to give customers personalised ‘risk warnings’ based on their plans for accessing their savings.

But affected firms – including providers of personal pensions, stakeholder pensions, decumulation products and execution-only business – have just a month to put preparations in place, increasing the risk they simply use a blanket approach to comply.

The race to comply

At the end of January the FCA finally caved to growing pressure from industry bodies and politicians and announced extra protection for consumers, the so-called second line of defence.

There had been fears customers who shunned Government-backed guidance service Pension Wise and did not take financial advice would lose out when given unfettered access to their pensions.

The rules outline the kinds of risks providers need to alert customers to when they decide what to do with their pension.

However, firms are expected to tailor the risk warnings they give based on the customer’s preferred way of accessing their pension and on their understanding of the risks they will have to bear as a result.

But MGM Advantage pensions technical director Andrew Tully says the race to comply with the new rules, at the same time as preparing for the pension freedoms themselves and the charge cap on default funds, could mean warnings are not tailored.

He says: “Trying to do all this in four weeks is not straightforward because you’ve got to write all the stuff and then you’ve got to figure out who it applies to. It becomes quite difficult unless you’re having a conversation with people and taking them through a route. If you’re trying to do it in writing, which I think most will want to do, it will be a challenge.

“I imagine a blanket approach may well be what people do initially.”

The final rules are tighter than many had imagined, with providers required to give risk warnings even if the customer has used Pension Wise, which aims to explain retirement income options and stop the most basic mistakes, such as withdrawing too much and paying unnecessary income tax.

Aegon regulatory strategy director Steven Cameron says some customers could be frustrated by the red tape they will have to go through before getting their hands on their pensions.

He says: “They approach their provider and ask for their money. We say ‘have you sought advice or gone through Pension Wise? If not we strongly recommend you do.’ Pension Wise will then give them an appointment in a few days or weeks’ time. They go to Pension Wise, possibly with the expectation they’ll be told what to do next.

“But they’ll just get facts on their options to help them make a decision. They then phone their provider and we say, ‘Right we need to ask you some questions to identify if there are any risks’ and then we give them a list of risks, some of which we can’t answer – such as how means-tested benefits could be affected.

“That kind of process could take a number of weeks and for someone who just wants their income it could be quite frustrating.”

Fidelity Worldwide Investment retirement director Alan Higham adds: “Someone might just want back a year’s contributions but has to go through loads of conversations and risk warnings. Putting a year’s contributions in wasn’t a big deal but taking it out is.

“It’s right that people are warned but will all these warnings scare people off? And will people end up not doing anything because they’re too frightened? As Steve Webb said, it’s a big experiment and we’re not entirely sure how people will come out of this system.”

But FCA head of investment David Geale says the intention of the risk warnings is to cut the amount of unnecessary information being loaded onto customers, not increase it.

He says: “One of our concerns is people will be given a big pack of papers that have every risk warning under the sun and it won’t be effective because it’s not tailored to the individual. It’s about making that warning appropriate and helpful to the individual rather than just throwing the kitchen sink at them.”

Higham thinks the bottleneck will be with providers’ phone support.

He says: “It will have to drive people onto the phones, I imagine it will cause a pinch point. I don’t see it working by letter or even by email, it lends itself to a conversation.”

Scottish Widows recently announced it had hired 400 new staff to deal with enquiries as a result of the pension reforms.

Head of pensions market development Ian Naismith says: “We want to talk it through properly with customers instead of watching people’s eyes glaze over as we read through a list of risk warnings.

“There’s a real danger it becomes a box-ticking compliance exercise. We have hired, trained and developed quite sophisticated systems for customers. We believe we’re very well placed, but it’s not very helpful of the FCA to give us so little time to do this.”

Providers are also required to keep track of how and when customers have been given risk warnings, as well as when they use Pension Wise. But Aviva head of pensions policy John Lawson thinks this is easier said than done.

He says: “The most difficult bit for providers is keeping records for each individual customer to show when you last gave them risk warnings and what those warnings were. If they contact you again, you’re supposed to know about details of previous interaction, whether it’s over the phone or online.

“We’ll have to be quite tight on web warnings for instance, making customers log on so we can track what they’ve seen.”

Crossing the advice line

Experts also warn the new regulation’s focus on personalisation could push providers towards advice.

Hargreaves Lansdown head of pensions research Tom McPhail says: “Anything beyond information is potentially going to be interpreted as advice. In the context of that regulatory environment requirements around the second line of defence and interaction with the customer are inevitably going to give some cause for concern from providers as to where the boundaries lie.”

But Higham says the FCA is softening its stance on the rigid boundary between advice and guidance. He says: “The FCA brought in this concept of advice without a personal recommendation, tools that give you risk ratings that prompt you to make a choice. The regulator says that isn’t a recommendation. That puts a different set of responsibilities on providers.”

More upheaval?

The regulator has already said it will be holding a summer consultation on whether to “retain, modify or add” to providers’ new requirements. So the industry could find itself having to adapt to yet another set of changes, just months into the new pension landscape.

Geale says: “The decision to do this without consultation was a decision we took very seriously. But the consultation will bring benefits in terms of refining what we have as a proposal.

“In the summer we’ll look at the whole of our rules across pensions and look to refine them. What we have is fit for purpose but with the volume of change we had, there will be some areas where it makes sense to make a few tweaks. It’s part of a broader look, it’s not about making major changes.”

Adviser view


Lee Robertson, director, Investment Quorum

It’s right that there is a second line of defence but I think there’s a potential danger here that the public think they’re getting advice from providers. I suspect providers will try to differentiate what they give from advice but the public won’t see the difference – most people consider any kind of commentary on their situation as advice.


September 2014: Money Marketing reports industry calls for a second line of defence to catch customers who shun Pension Wise and regulated advice.

October 2014: The FCA’s Maggie Craig tells Money Marketing the regulator is not working on a backstop.

December 2014: MPs warn the FCA there will be a “misselling issue” within five years unless it introduces new rules.

January 2015: The FCA U-turns and says it will introduce “additional protection” in time for April.

February 2015: The regulator publishes rules on how providers should use “risk warnings”.

Summer 2015: The FCA plans to consult on the new rules as part of a broader review of its regulation of pensions.

Expert view


For the second line of defence to work it has to be part of a meaningful conversation, it’s not just frontline staff who would normally simply sell products. You’re going to need people on the telephone and they’re going to have to be well versed on a provider’s own products as well as the issues people need to consider.

The new pension freedoms, as well as increasing the choice and complexity for consumers, will also make servicing customers more complicated. Providers are going to have to up their game and have more skilled people dealing with pension queries. If the customers end up unhappy they’ll come back and blame providers that their warnings weren’t clear enough.

A provider wouldn’t naturally want to talk to customers about whether they qualify for means-tested benefits or are being chased for debt because that could offend them. They will need really good soft skills on those sorts of issues that have never been raised before.

In the future, providers might consider that it is just easier to advise people. At the moment, you’re doing the dance of the seven veils giving people information and risk warnings to help steer them to the right place. We could see advice making a comeback, especially if we got rid of the commission bias – asking customers’ permission to get paid out of their pension for a service should be the norm.

Alan Higham is retirement director at Fidelity Worldwide Investment



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There are 8 comments at the moment, we would love to hear your opinion too.

  1. Someone at the FCA needs to realise that less is more too much paper will not protect it will confuse.
    Given that they seem sold on Behavioural Science can they apply that to the COBS too? By building rules/guidance that informs through brevity and not volume

  2. Claire Trott - Talbot & Muir 6th March 2015 at 9:44 am

    The FCA state that a “we do not believe that the provision of a simple a pre-prepared factsheet would be sufficient” which means we can not do a blanket approach.

    That said we will be doing this in writing, over the phone will not be feasible even for the low numbers of non-advised client we have accessing their pensions. We need a clear record of what they told us and what we then gave back to them and written signed statements are the safest option for a provider,

  3. Julian Stevens 6th March 2015 at 9:54 am

    What about the overload caused by the FS/CA’s 10,000 page rule book? This truly colossal tome (which must surely dwarf even Tolstoy’s War and Peace) is so voluminous and so labrynthine that compliance with every aspect of it is utterly impossible and not even anyone within the FS/CA itself is or ever could be familiar with it all.

    As for these new unfettered access provisions, I still think it’s a Pandora’s box of woes just waiting to erupt that could have been avoided by stipulating a maximum withdrawal limit of 7.5% p.a. The premise that people can and should be trusted to act responsibly with their pension funds is a completely pie-in-the-sky notion, highly likely to lead to all sorts of disasters for which, we may be sure, the unfortunate victims of their own precipitous folly will look to someone else to blame, no doubt enthusiastically egged on by the CMC’s.

  4. Robert Reid, wise words. For the average client, like it or not, anything that is personalised will appear as advice.

    There are so many things that can go wrong for an individual client (tax, lack/loss of income, etc.) that it is inevitable that they will for a significant number of people. Fingers are going to point. Politicians, Pension Wise, regulators, providers and advisers will be all looking to dodge the bullet. At least advisers have a choice about how involved they get. If I was the FCA I would be very concerned.

  5. Personally I have been to 2 conferences of as many weeks, and I get the distinct feeling the FCA and providers don’t really know what to expect and are trying to blanket cover.

    The FCA cant get around their own rule book, they are basically a mile long container ship halfway up the Thames; cant turn round and cant reverse, (stopping in their eyes is not an option) so they just keep going until they run aground.

    The providers cant get any real sense from the FCA and therefore left with huge cost to provide as much cover as possible.

    Robert Reid really is spot on ! less is more

  6. Unfortunately like everything the FCA intend to happen, it will create a monster of paperwork and confusion for those they are trying to protect. It may be their intention to generate less paperwork but with their ion rod rulings, the providers will, without exception, go overboard with information so they and say “We did everything you wanted us to do”. The whole thing is going be a total disaster. What is to stop the client calling their provider straight back to request their money for the 2nd time and when asked by the provider “Have you spoken to Pensionwise or an adviser?” they say “yip, now give me my pension money”. It is a truly pathetic situation.

  7. Call a spade... 6th March 2015 at 10:45 am

    In his Budget speech last year, Osborne said: “People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances. And that’s precisely what we will now do. Trust the people…..Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, any time they want.”

    It seems this has now become: “We don’t trust the people, we don’t want them to have complete freedom and we certainly don’t want them getting their hands on their pension pots any time they want – at least, not without a whole raft of warnings they probaby won’t understand or even bother to read.” How does this help anyone?!

  8. Given that the average pension fund size is apparently only about £30K, it seems decidedly fanciful to talk about people who ” have worked hard and saved hard all their lives, and done the right thing”. The core problem is that far too many people have manifestly NOT saved hard all their lives or saved hard for even part of their lives. If they had, their pension funds would surely be much bigger than £30K.

    I think the biggest problems ahead are going to stem from people cashing in their pension funds without or contrary to advice, getting hit with a nasty tax bill, putting what’s left into an unsuitable, possibly very risky alternative investment scheme and then having nothing but their State pension on which to fall back.

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