RegulationNov 28 2014

Lump sum will be sold on non-advised basis: Providers

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Yesterday, the Financial Conduct Authority published a consultation paper on the ‘guidance guarantee’. One part of the paper that concerns both intermediaries and insurers was around the regulation of the new uncrystallised fund pension lump sum option.

As FTAdviser reported, until formal rules are drafted, the FCA expects firms to treat uncrystallised lump sums - which have recently been characterised as allowing pensions to be treated like a ‘bank account’ - as they would drawdown, which for many providers will require advice to be taken.

John Lawson, head of policy at Aviva, pointed out that it is possible to buy drawdown as an unadvised customer and therefore possible to go down the lump sum route as an unadvised customer.

“What this part of the paper says is that advisers should treat UFPLS like they would drawdown from an advice point of view, particularly when considering sustainability of income over lifetime. As far as non-advised customers are concerned, firms should ensure that sufficient information is provided to the customer to allow them to make an informed choice.”

Alastair Black, head of income solutions at Standard Life, stated that the firm already sells drawdown on a non-advised basis, so planned to do the same for UFPLS.

“I do think it’s important that providers help customers understand the risks, but the FCA mentioned in the paper that not all drawdown must be advised.”

Fiona Tait, business development manager at Royal London, explained that the requirement for prospective retirees to seek advice before using the lump sum option is not from the regulator, but incumbent on product providers.

“At Royal London we have decided that pension policy holders looking at that option will receive documentation with strong wording encouraging them to get advice, but will stop short of saying they have to, after all it’s still their money.”

Mr Black also noted that the regulator’s paper brought some clarity to how contract and trust-based defined contribution pension schemes would have to deal with the new drawdown options, calling on The Pensions Regulator to do the same.

Mr Lawson agreed, questioning the assertion that there will be a level playing field between contract and trust-based schemes, with Department for Work and Pensions making mirror rules for occupational schemes to follow.

“This is clearly not the case, as occupational schemes appear to escape paying their fair share of the levy to fund the guidance guarantee. We would call on DWP to make its position clear on levies for occupational schemes and the contribution they should make to the guidance.”

Advisers had long suspected that there might be a trade-off between the guidance guarantee levy they would be required to pay part of and the increased business they might receive off the back of the guidance sessions.

The FCA’s paper confirmed that at the end of a session the guidance provider must refer consumers to relevant sources of further information, including specialist advice, regulated advice, support tools or directories.

Meanwhile, the regulator’s policy proposals for 2015/16 fees and levies revealed an equal allocation of guidance costs across the five fee-blocks, with a 50 per cent reduction for ‘A13’; covering most advisers. Small firms below a fee threshold of £100,000 will not be required to pay at all.

Jonathan Plumtree, head of Zurich Corporate Savings and the UK life business, said: “The proposed reduction on the new levy for advisers is an important step. Advisers have a key role to play in helping people make the right choices in the new retirement savings landscape, so such moves to help them deliver advice are welcome.”

The Association of Professional Financial Advisers also welcomed the news, calculating that with an assumed annual cost of £20m for the guidance guarantee, the levy update for advisers represents a saving of between £2m and £4m a year.

However, advisers still have doubts as to how the guidance will actually work in practice.

Simon Linstead, director at Nurture Financial Planning, told FTAdviser: “In these instances guidance simply isn’t enough and I have concerns around the experience of the Citizens Advice Bureau to deliver appropriate guidance anyway in such a complex area.”

Phil Marten, chartered financial planner at Octagon Consultancy, commented that it is human nature to follow the path of least resistance.

“If the option to access an ad hoc lump sum is the easiest option, I suspect many people will use this, passing the opportunity of advice as time-consuming or costly.

“The requirement of advice would also appear to close the door on non-regulated firms providing this ‘pension unlocking’.”

Karen Barrett, chief executive of unbiased.co.uk, argued that more still needs to be done to make sure the post guidance consumer journey is better defined and includes a clear path to regulated advice.

“There is no doubt that whole of market advice delivers the best outcome for people who are looking at their retirement income options and as such we believe clear signposting to advice should be an outcome of any and all guidance sessions.”

While the Money Advice Service is being tasked with compiling a directory of pensions advisers to handle post-guidance requests, Ms Barrett pitched her website as ideally suited to handle the traffic.

“The advisers we list are uniquely positioned to ensure that consumers make the right decisions regarding their retirement and can feel confident they can enjoy their golden years,” she added.