The biggest opportunity Mifid II could have given us was to burn the current format for product illustrations and create something meaningful and consistent from the ashes. It is an opportunity which will be missed.
The requirement to aggregate costs and charges, and project their cumulative impact over time means illustrations may well be modified.
Sadly, the deadline to implement – 3 January 2018 – means that, even if the relevant people were locked in a room together and not allowed out until Boxing Day, they would still not have time to make the changes to technology, test and deliver it in time.
What we will end up with is unlikely to be anything more than a quick fix designed to achieve Mifid II compliance rather than something useful to anyone.
Annual reminders of aggregated fees and charges could be beneficial but, for new clients trying to understand the paperwork presented for the first time, it is an almost impossible task.
When I suggested key features illustrations were dreadful during my recent Mifid II seminars for Nucleus Illuminate, every adviser nodded. They are not about helping financially illiterate consumers. I do not understand the pensions illustrations I receive and I have been working in financial services for over 20 years. It is not just the content; the inability to compare one illustration to another makes any gains in understanding short lived.
These are consumer documents which should not require an adviser to explain them. Most people reading them will not have an adviser at all. The ongoing debate about improving adviser communications, especially suitability reports, is a sideshow compared to the need to reform pensions illustrations.
This is backed up by pension providers. In January, AJ Bell published a survey which found 61 per cent of advisers thought illustrations did not explain to clients the charges they will pay and the benefits they will receive from the product they are investing in. As a pension provider responsible for producing these documents, it clearly felt hamstrung by the regulations which govern it, not its own creative abilities.
Illustrations are the place where a number of mandatory actuarial calculations and projections are documented. The costs involved in actuarial services to maintain and update them is significant, not to mention the technology spend. The cost is all the greater if they are universally derided as useless.
The Financial Advice and Market Review (remember that?) suggested consumer confusion would be resolved by improving suitability reports, and failed to even mention KFIs, which often run to a dozen or more pages.
So, with KFIs likely to change again under Mifid II, why will we see no significant improvement again?
There will be no consistency as the FCA refuses to set a template to follow. In PS17/14, the regulator acknowledges the dangers of this and recognises it will breed inconsistency from one firm to the next in how the disclosure requirements will be implemented. This is not specific to the new aggregated costs requirements. Illustrations already vary from one provider to the next, and not just cosmetically.
The changes due in January to key information documents via the Priips regulation and to insurance product disclosure through the Insurance Distribution Directive in February, seem to be too burdensome for a co-ordinated approach right now, even though that is exactly what is required.
Put simply, the FCA has put this in the “too difficult to do” pile.
As I have mentioned, the speed of development means collaboration and real change, spearheaded by the industry rather than the regulator, is impossible in the timescales allowed.
I am yet to find anyone who thinks illustrations fulfil the fundamental objective they were designed for. Part of the problem, beyond the constant changes made to them which add more information rather than understanding, may be a loss of what that objective was.
All I want to know from my pension illustration is how much money I have put in, how much it equates to now, how much I am paying my provider and fund manager for the privilege (it is incredible this is so hard to find) and what that might be worth at a future point in time in real and actual terms. I just want information. I do not want to be excited, engaged, stirred into action, nudged into a fund switch or anything else. I do not even want to be advised. I just want clear information.
Mifid II does not require any radical change to illustrations (arguably, none at all), so we will end up no further forward. My hope is that there is enough momentum from advisers and providers as a result of these frustrating, piecemeal changes to keep developing illustrations into something more useful for policyholders or to scrap them altogether. It might take us another 12 or 18 months but it will have more of an impact than suitability reports.
Phil Young is managing partner at Zero Support