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Leader: FCA saw the non-advised drawdown problem coming

Should income drawdown be sold on a non-advised basis? Trailing through the MM archives, it seems both the FCA and its predecessor have long held concerns about the risks of entering into drawdown contracts without advice. According to pensions commentator Alan Higham, when a former FSA pensions boss was asked this same question back in 2011, the answer that came back was a categorical “No”.

Last year it emerged non-advised sales would be a particular focus when the time comes for the FCA to review pension freedoms advice. Senior technical manager Rory Percival said the regulator was worried the risks of drawdown were not being managed in the non-advised space. This was followed soon after by director of competition Mary Starks, who said the failure among savers to compare drawdown products was an area of concern.

Yet despite the regulator repeatedly voicing these reservations, we now find ourselves in the position where a surge in demand for non-advised drawdown has directly coincided with around a 20 per cent fall in the FTSE 100 since pension freedoms were introduced. As traders try to second-guess the fortunes of the US, China, and the beleaguered oil giants, savers who decided to draw down an income have seen market losses compounded and their pension pot eroded as a result.

It was all too easy for Chancellor George Osborne to grant savers the power of pension freedom, and to espouse the value of allowing them to do what they want with their hard fought pension pot.

What escaped him, though apparently not the FCA, was the need to underpin that freedom with the appropriate safeguards. While it is true we have some advice requirements, there is nothing governing drawdown in relation to the risks of pound cost ravaging, and the suitable investment strategies needed to maintain a retirement income for as long as possible.

Many providers have piled in to non-advised drawdown and taken varying approaches on protecting consumers, such as minimum pot sizes, “bucketing” risk strategies, restricted investment ranges and limiting non-advised drawdown to insistent clients. Further intervention from policymakers may yet be needed.

It was little over a year ago that another FCA boss, ousted chief executive Martin Wheatley, warned about rushing things that are “not properly thought through”. This was in the context of pension freedoms products rather than the reforms themselves. But if, as predicted by some, drawdown becomes the next misselling scandal, his words may come back to haunt the very man who forced Wheatley out.

Natalie Holt is editor of Money Marketing. Follow her on Twitter: @Natalie_Holt_MM

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. My guess is that the FCA would have outlawed non-advised DrawDown but the Treasury wouldn’t let them do it. What other explanation can there be?

  2. Why does non-advised drawdown + market falls = misselling? Does non-advised drawdown + market gains = not misselling?

  3. Do we really want people forced to pay our fees when the vast majority can manage their affairs perfectly well.
    People who value our service pay our fees, others don’t and they shouldn’t be forced to pay our fees.

  4. headbelowthe parapet 19th February 2016 at 9:13 am

    Yeah, I bet Gideon is frantic! As if any politician ever gave an actual shit about consequences that might happen when they’re out of office and enjoying their post-parliament consultancy work…

  5. I’m sure Osbourne couldn’t honestly care less…

  6. Adrian Philips ~ On what hard data do you base your assertion that the vast majority [of people] can manage their affairs perfectly well? Managing a portfolio of fairly straightforward investments is one thing but Income DrawDown is no cakewalk even for experienced advisers. I suggest that a lot of people who’ve rushed to non-advised DrawDown may THINK they can manage it without advice but the reality may well prove that they can’t. How many people realise the simple fact that a 20% fall in the value of their fund will require 25% recovery growth to get back to par (and that’s without the ongoing drag of income being drawn)?

    I’ve no reason to suspect that the average American or Australian is any less adept than the average Brit. at managing their finances and investments, though hard data tells us that a third of them burn out their pension funds prematurely in retirement, very probably because they steamed into DrawDown without taking either initial or ongoing advice which, in hindsight, would very probably have been worth paying for.

  7. firstly, has anybody actually spoken to any of these poor benighted souls who have presumably put their drawdown pot 100% into equities and found out whether this issue is actually an issue? My suspicion (with probably about as much empirical evidence as the article i.e. none) is that many of the non-advised drawdown cases will probably have ended up in cash rather than equities and will have ridden out the market correction. I’m not that familiar with the non-adviser products available, but have dealt with HL previously. They only invest in what you tell them to invest in and I don’t think there are default funds for non-adviser drawdown.

    If people did choose to go into equities and are now seeing paper losses because of this (and probably dis-advantage in retirement because of pound cost ravaging), then isn’t this their business and nothing really to do with regulators / advisers / government.

    Freedom is just that, if you make a bad decision, then you have to live with it, just as if you make a good decision then you might make a few pennies more than if you had paid an adviser.

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