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The incoming consumer duty will set a new standard for financial services firms, demanding they stop and think about the consequences of all their interactions with their consumers.
Firms will need to ensure good outcomes in four areas: governance of products and services; price and value; customer support; and consumer understanding.
It should lead to a step change in the quality of consumer experience of financial services.
The various rule-makers that govern financial services should also take a good hard look at the regulations they put in place and apply the same tests themselves – does a piece of regulation help to deliver on those four key areas? And if not, why?
Taking a glance at the current landscape of the UK pensions system, there are at least three topical areas where rules and regulations risk falling short on the 'consumer understanding' check:
1. Three annual allowances
‘How much money can I tax-efficiently invest in a pension?’ That should be a simple question to answer. But sadly it is not. In fact, it is actually rather tricky.
As well as the standard annual allowance of £40,000, firms have to explain how the customer’s level of UK relevant earnings – and whatever income they are made up from – could restrict tax relief. And that is before the areas of tapered annual allowance and money purchase annual allowance are covered.
How much easier to understand it would be if there were just one single annual allowance for defined contribution pension savers. And a lifetime allowance only for defined benefit scheme members.
2. Investment pathways for platform pensions
The problem with investment pathways regulations is that they do not fit into the world of platform pensions and therefore do not make a lot of sense to these types of savers. The regulations are written in such a way that does not allow wiggle room on the content and timing of the messages that providers have to give.
When the pension investor requests tax-free cash and/or income, they are bombarded with messages about investment. At that moment all they are bothered about is the money being paid into their bank account.
It would be far more effective if once payments had been made providers then engaged savers about making good investment choices with their remaining pot.
3. Growth projections based on volatility
The Financial Reporting Council is currently proposing changes to the growth rate assumptions for projections of future pension pots and retirement income for both annual statements and the pensions dashboards. It wants to base this on the volatility of each separate investment held in the pension pot. Try explaining that succinctly and easily to customers.
Projections are just best guesses. Investors do not need an exact number, they need an indication of what could happen. After all, there are so many things that will change after the date of projection – contribution rates and patterns, retirement age, and investment strategy to name but three.
Keep it simple. Instead of using rates based on volatility, it would be more straightforward just to assume a simple single rate for the pot. The projection will end up in the same ballpark, and people will have a much better chance of getting their head around the numbers, making that consumer understanding test a lot easier to achieve.
Good consumer understanding is vital. Giving consumers the information they need, at the right time, and presented in a way they can understand is the bedrock to helping them make better financial decisions, and ultimately achieve a more stable and prosperous financial life.
Firms embedding the consumer duty into their activity is only half the story. To truly get ground-breaking change, the rule-makers also need to walk the walk, and fully adopt these principles.
Rachel Vahey is head of policy development at AJ Bell
