Pension FreedomJul 20 2017

Regulator rules out limited advice for small pension pots

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Regulator rules out limited advice for small pension pots

The FCA has ruled out changing rules for financial advisers that would allow them to offer a limited at-retirement advice service affordable to those with smaller pension pots.

Last week in a 122-page paper the Financial Conduct Authority revealed consumers who access their small pension pots early without taking advice typically fail to achieve the best possible retirement income available to them.

Non-advised savers with smaller pots are losing out because they follow the ‘path of least resistance’ and accept drawdown from their current pension provider without shopping around, the regulator reported.

Before the pension freedoms, the FCA's Retirement Outcomes Review interim report stated, 5 per cent of drawdown was bought without advice. This is compared to 30 per cent now. 

As drawdown is complex the FCA stated these consumers may need more support and protection.

More than half (52 per cent) of fully withdrawn pots by non-advised savers were not spent but moved into other less tax efficient savings or investments. 

In an exclusive interview with FTAdviser, Mary Starks, director of competition at the FCA, was asked, given what the Retirement Outcomes Review uncovered, why wasn’t the regulator looking to make changes to the rules so advisers could help savers with smaller pension pots figure out what they should do post pension freedoms.

At the Association of British Insurers Long Term Savings Conference earlier this month Martin Rumsey, director of KPMG, said the current regulatory regime did not allow advisers or providers to assist the bulk of those trying to make sense of pension freedoms.

According to Mr Rumsey this is because a lot of the language of the Financial Conduct Authority was around achieving the “best outcome” for at-retirement savers without acknowledging the cost of achieving that is too great for the average person.

He said the FCA needed to come up with a regulatory regime that allowed advisers to assist savers with getting a “better outcome” than they would do if they received no assistance at all.

When asked would the regulator consider changing regulatory requirements to allow advisers to deliver limited, cheaper advice to savers with smaller pots, Ms Starks said: “This report very deliberately looked at the non-advised market because we were kicking it off at the same time as the Financial Advice Market Review.

“For the pot sizes we have been looking at in this report, full-on traditional face-to-face financial advice is simply too expensive and not worth doing if you have a pot of only £10,000.

“We will definitely look at low-cost mass market solutions to emerge and we are engaged in an active dialogue via the Advice Unit and sandbox around what those options might look like and how those options might be made to work both from a consumers point of view, a firm’s perspective and a regulatory perspective.”

Back in April the Financial Conduct Authority announced it would expand the scope of its advice unit to cover a wider range of services.

The advice unit was set up after the Financial Advice Market Review, which was tasked with tackling the advice gap.

When pushed was the FCA therefore only looking at automated advice, guidance services and tools in a bid to assist those with smaller pots trying to make sense of pension freedoms rather than work on a new set of rules for generic or limited advice, Ms Starks said: “The issue is cost. 

“Robo is one obvious response to a cost challenge but it isn’t the only response. We are not favouring one track over any other.”

When asked to comment on the FCA’s stance, John Cowan, executive chairman of Sesame Bankhall Group, said everyone would like to see a solution which gives more people access to financial advice.

But he acknowledged there are a number of challenges to achieving this. 

Mr Cowan said: “Any form of streamlined or limited service would have to sit somewhere between ‘guided’ services offered by the likes of Pension Wise and a full advised process. 

“However, attempts to position advice within this area before, such as the simplified advice initiative, haven’t taken off due to the obligations that still remain with the adviser. 

“The service also has to be delivered at a cost which is reasonable for both the customer and the adviser. 

“The issue of cost is something which the FCA is obviously sensitive to, particularly in relation to customers with low levels of pension savings, so it’s understandable that the FCA is looking at other means of serving this customer segment. 

“However, the (FCA’s) report also set out concerns over high-charging drawdown contracts that some customers enter into without advice, so this is clearly a difficult balance to strike.”

Simon Thomas, head of policy at Tenet, said ultimately the affordability of advice for those with lesser amounts of money to invest was not an issue for advisers to solve. 

He said: “Their (adviser) business has to remain commercially viable and cover the increasing costs of professional indemnity insurance and regulatory fees and levies.  

“It is not economic for advisers to offer a service to these consumers where the standards expected remain the same.”

Keith Richards, chief executive of the Personal Finance Society, said to suggest that consumers with pension pots valued less than £30,000 would not see value in a traditional face-to-face financial advice service, which extends much further than purely pension investment advice, was disappointing.

He said: “By developing a long-term financial plan, specific to the needs of the client and their specific retirement, investment, savings, mortgage, debt and family needs, professional advice can be a valuable tool for consumers at all stages of life and wealth.

“Already, many financial advisers have the capacity and means to deliver a streamlined advice service, at a cost that is appropriate for the needs of their client.

“The FCA’s proposal to limit regulated advice to instances where a personal recommendation is given will remove some of the barriers that exist for regulated firms that wish to offer guidance services. 

“In many cases, the newly proposed guidance definition will be appropriate for relatively straightforward at-retirement advice requirements for those with smaller pension pots, and the FCA should be considering how to increase access rather than restricting.

“There is no doubt that the growth of robo-advice will continue to introduce new ways to deliver simplified advice, and will continue to play a big role in the future of the financial advice market. 

“But alone, it is not the solution to engaging a larger proportion of consumers who should be seeking the services of a professional adviser at key life stages. 

“We are keen to work with the regulator to find a long-term solution to increasing public engagement with the financial advice market, and one that strikes the right balance between the cost and accessibility of advice and the regulatory certainty afforded to the adviser.”

On Tuesday (18 July) the FCA revealed it will produce new rules for streamlined advice this year.

Speaking at the FCA’s annual public meeting, the regulator’s chief executive Andrew Bailey said the watchdog would deliver new rules for streamlined advice in a bid to plug the advice gap.

Post pension freedoms, Mr Bailey said: “The demand for advice and support for consumers now operates in both the accumulation stage and in the decumulation phase.

“Alongside [increasing demand for advice] sits the Financial Advice Market Review. We are continuing work on our approach towards advice and that applies particularly towards pensions.

“As part of FAMR we will introduce new rules, most notably on streamlined advice services, which we hope will ensure more cost effective investment advice.”

emma.hughes@ft.com