The Financial Conduct Authority needs to refine the proposed rules on investment pathways, otherwise providers run the risk of being seen as giving advice, Royal London as warned.
As part of its latest work on retirement the FCA proposed pension providers offer their non-advised customers a choice of investment pathways to meet their retirement objectives.
But in its response to the regulator’s consultation on this topic, which closed on April 5, the mutual insurer stated that it doesn’t believe "providers can offer investment pathways in the way intended without giving the consumer a personal recommendation".
A Royal London spokesperson said: "Providers need a safe harbour in offering investment pathways [to ensure] they’re not giving investment advice to consumers."
The FCA proposed four pathways after it found many consumers were solely focused on taking tax-free cash from their pensions and were "insufficiently engaged" with deciding how to invest funds that moved into drawdown.
The pathways include an option for consumers who have no plans to touch their money in the next five years and for those who plan to use their money to set up a guaranteed income within the next five years.
The regulator also proposed an option for consumers who plan to start taking money as a long-term income within the next five years and those who plan to take out all their money within the next five years.
The regulator stated providers would need to treat consumers as non-advised if they make an investment decision more than 12 months after the transaction they had been advised on.
This will also be the case within the 12-month period if the client doesn’t confirm that their personal or financial circumstances have remained unchanged since receiving advice.
But Royal London has warned the watchdog that its definition of non-advised client in this area "needs to be tightened".
"Otherwise an adviser could potentially be held responsible for decisions made by the consumer on the subsequent transaction if the consumer says their circumstances are unchanged for it," a spokesperson for the mutual stressed.
Aegon, which has previously warned that the proposed rules could see advised clients be classified as non-advised, also responded to the consultation.
Steven Cameron, pensions director at the company, said the "FCA’s proposals err too much on the side of providers having to prove consumers are ‘advised’".
He noted that consumers "will struggle to identify relevant changes" in personal or financial circumstances, which means "this approach risks providers excessively interfering with adviser/ client relationships".
The proposed rules for considering if a client is advised or not also mean providers may have to frequently question customers, Mr Cameron noted.
He said: "We believe this degree of questioning is excessive and may be seen as unduly interfering with the customer’s relationship with their adviser.
"It is also likely to slow down the time taken to switch investments, taking away one of the benefits of online propositions."
The FCA is proposing that providers have available at least two options of the four available for their clients.
But Royal London disagrees with this proposal and argued that providers should be required to offer solutions for all four objectives, or none at all.
The spokesperson said: "Most consumers are not financially savvy and will not move to another provider.
"Providers are likely to only offer pathway solutions for those objectives they can make the most money from."
Royal London also stated that providers should be allowed to offer more than one investment solution for each pathway, to allow for different consumer risk profiles.
The spokesperson said: "Putting a consumer into a solution that does not correspond to their risk profile could cause them considerable harm or result in them losing out on future investment returns, both of which are undesirable outcomes and can easily be avoided."
On the other hand, Mr Cameron agrees with the FCA that providers shouldn’t offer multiple funds within each pathway, as it "would make the process far more complicated".
He said: "But this means providers will need to identify a ‘default’ investment risk level for all customers choosing a particular pathway. In practice, the customers choosing any of the pathways could have significantly different attitudes towards investment risk.
"This means providers have a difficult balancing act as there are risks both in offering a fund with too high a risk profile but also, as the FCA’s concerns over defaulting into cash show, in offering too low a risk profile.
"It is not clear how a provider could ‘err on the side of safety’ here. The FCA must give providers some confidence that they will not unduly second guess decisions reached here."
The FCA is planning to publish its final rules on this topic by the end of July 2019.
Paul Stocks, financial services director at Dobson & Hodge, said while inertia works for auto-enrolment, "trying to have a similar approach in drawdown opens up a larger number of potential outcomes which, once married with a range of risk profiles, is potentially starting to open up a maze rather than a pathway."
He added: "There is also a danger investors take guidance as advice – something which is dangerous.
"It is therefore critical that investors are signposted to advice and are also made acutely aware that anything offered by providers under a pathway isn’t advice and isn’t personal to them, and therefore the investor carries the responsibility and liability for their actions.
"Providers therefore need to be protected from the risks of a perception of advice having being given."
maria.espadinha@ft.com
