The Financial Conduct Authority's final rules on investment pathways will see providers decide for themselves whether a client has been advised or not.
The FCA published the final 77-page policy statement of its Retirement Outcomes Review today (July 30) in which it confirmed rules requiring drawdown providers to offer non-advised consumers a choice of four investment pathways.
Concerns have previously been raised that the FCA's incoming investment pathways rules could see advised clients be classified as non-advised and therefore open up the gates for possible poaching.
This was because the consultation paper published in January 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 if the client doesn’t confirm that their personal or financial circumstances have remained unchanged since receiving advice.
In response to industry feedback the regulator has now amended its originally proposed rules to remove the need for providers to ask a consumer whether they are advised if they have "clear evidence" as to whether that client has received advice on the specific transaction.
This came after some respondents argued consumers may struggle to answer the questions and providers would already know with a "good degree of confidence" if an adviser was used in a transaction or not.
The regulator also expects providers to tell consumers if they are paying an ongoing advice charge.
But the regulator specified it did not believe an ongoing adviser charge to be sufficient evidence of a consumer being advised.
In fact, the FCA said if a consumer who is paying an advice fee approaches a provider themselves this could indicate they are not aware they are paying for advice.
In this case the regulator said it expects providers to tell these consumers they are paying an ongoing advice charge and explain what the fee means in a drawdown context.
The FCA's final rules will also see providers ensure non-advised clients entering drawdown invest wholly or predominately in cash only if they take an active decision to do so.
The regulator said it expects providers to issue warnings to consumers who decide to invest in cash, as well as those already in cash when the final rules come into force.
Pension providers will also have to give consumers in decumulation information on the costs and charges they have paid on their pension pot on annual basis, to be communicated in a single pounds and pence figure.
This disclosure of charges applies to both advised and non-advised consumers who are in drawdown or who have withdrawn at the least one uncrystallised fund pension lump sum payment.
The changes were introduced following findings by the FCA that many consumers were solely focused on taking tax-free cash from their pensions and were "insufficiently engaged" with the decision around how to invest the remaining funds that moved into drawdown.
The FCA has stuck to its guns on allowing providers 12 months to implement the changes, despite respondent providers claiming such a timeline would be "challenging" as a result of IT and system changes and suggesting an 18 month implementation period instead.
Small providers will be able to rely on an easement however, so that while they have to present the investment pathways, they do not have to offer investment solutions - the ‘pathway solutions’ - themselves.
The regulator said delaying implementation, even by a few months, would "increase consumer detriment" with its data suggesting around 5,000 pension pots enter drawdown each month without advice being taken.
Stephen Lowe, group communications director at Just Group, said: "The implementation of investment pathways offers another protective blanket for consumers entering drawdown without taking advice, and the FCA’s announcement makes specific provision for those investing predominantly in cash.
"Further measures to improve transparency by giving consumers annual information on the fees they are incurring on their pension savings will also benefit both advised and non-advised consumers, and aim to drive increased shopping around."
But Mr Lowe warned the new rules continue to "treat the symptoms rather than the cause of the problems" which consumers face when accessing their pension savings without advice.
The final Retirement Outcomes Review found that around 30 per cent of consumers were entering drawdown without seeking advice or guidance and 33 per cent of these non-advised consumers were wholly holding cash putting them at risk of a significantly lower annual incomes or of running out of money, Mr Lowe said.
He added: "Improving the take up of advice or guidance is therefore crucial to improving later-life outcomes for many of these consumers."
"The Financial Guidance and Claims Act mandated everyone must receive independent and impartial guidance before accessing their pension savings – unless they opt out.
"The FCA is now tasked with determining the opt-out process and it must ensure that it is an ‘active’ rather than a ‘passive’ decision.
"While many argue this might cause friction for consumers, this is no bad thing as consumers juggle irreversible and complex decisions with their lifetime savings.
"Implementing this act successfully will be the biggest regulatory step since the introduction of pension freedom as it gets right to the heart of the problem and should improve the lives of millions."
rachel.addison@ft.com
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