The regulator’s evidence-based approach to assessing the impact on the lifetime savings market gives some clear pointers about future rules for advisers.
The FCA has published the text of a speech made by chief executive Andrew Bailey at Gleneagles on 15 September. It deals with the FCA’s views on the “lifetime savings model” in light of the impact that pension freedoms have had on this market, as set out in its Financial Lives study and the Retirement Outcomes Review.
It makes fascinating reading and gives some clear pointers about the future of regulation in this area.
The first thing to say is that the evidence collected allows the FCA to see clearly where the market is and is not working, and any developing trends. As a piece of research, it is to be commended and I think the FCA’s response, as set out in this speech, is thoughtful and considered.
To a certain extent, there are no huge surprises here. Some of the headlines are: many people (employed or self-employed) have little or no pension provision; there is a trend towards drawdown and away from annuities; 30 per cent of drawdowns are non-advised and the trend is for more non-advised drawdowns and annuities; around 10 per cent of people use guidance, so overall there is a large proportion taking neither advice nor guidance.
The above highlights the much-discussed advice gap, but what to do about that is the more interesting question. Clarifying the advice versus guidance boundary for firms is an FCA priority and it is hoped that this will result in a significant increase in technology-based solutions for both, but it remains to be seen if this will happen. I have a long-standing concern that although helpful, clarity on this boundary will not be a panacea, particularly as the Financial Ombudsman Service makes decisions based on what is “fair and reasonable”, rather than on nuanced technical definitions.
The proof of the pudding will be in the eating, but it is encouraging the problem has been clearly identified and innovative solutions appear to be encouraged by the regulator.
It may still be the case, however, that a new set of rules aimed at technology-driven solutions in a particular part of the market (possibly based on investment size and therefore overall risk to the FCA’s objective of securing an appropriate degree of consumer protection) will be required.
This would acknowledge allowing saving with a framework that limits, but does not totally exclude, the duties of the relevant firm may be better than no saving at all.
Just as interesting is the potential impact of the evidence on the regulation of pension providers. This makes sense – much energy is being directed at closing the advice and guidance gap by making it “easier” for them to be provided, or at least providing for more certainty around the risks involved in doing so. It is also sensible, however, to try to tackle the same problem from another angle. If consumers are not seeking advice or guidance then consideration needs to be given to how to prompt them to do so, and giving them an appropriate degree of protection if they don’t.
One interesting statistic is that just over 30 per cent of non-advised drawdown customers are defaulted into cash, which is unlikely to be appropriate unless the consumer intends to withdraw all their money over a short period. The reasons are not explored – could it be providers consider this approach represents the lowest regulatory risk?
If the FCA is able to make rules delivering more certainty for providers around the risks of defaulting other than into cash, this will be extremely helpful, along with proposals to offer simpler and more structured options to consumers.
It also appears there is more work to do on information provision leading up to retirement, as the number of consumers who stick with an existing provider rather than considering alternatives on reaching retirement is still high.
The final point to make is that there is still a clear lack of engagement from consumers about pensions and retirement income generally; apparently one in three people have no idea where their pension assets are invested.
This could be a hangover from the defined benefit era, when the pension holder didn’t feel the need to engage on that issue. Or it could be down to a perception among younger generations that they are unlikely to be able to retire on a decent income, meaning they are completely disinterested in engaging at that level of detail.
The long-term solution to these issues is financial education, starting at a very young age. That is not necessarily an issue for the FCA under the current regulatory framework but would certainly help in the longer term, not just with investment-based decisions but also with personal debt etc. It is, however, always very difficult in our political climate to gain long-term commitment to such initiatives.
Overall, I am encouraged by the considered and evidence-based approach to the issues identified by the FCA and look forward to more detailed regulatory proposals to address these over the next few years.
Alan Hughes is partner at Foot Anstey