How the FCA’s default investment options will affect advisers and providers

This is a wide-ranging, gangling piece of regulation requiring advisers and providers to unpick every process and communication to establish whether it results in good consumer outcomes. 

Another set of new Financial Conduct Authority rules to implement this year are focused on non-workplace pensions. These rules do two things:

1. they introduce a new default investment option that has to be offered to non-advised customers taking out a pension; and
2. they require providers to give customers a mandatory warning if they stay invested in cash for a significant period of time. The cash warnings have to be given to both advised and non-advised customers.

The implementation date for the new rules is December 1 2023. This article runs through these new rules and discusses the implications for providers and advisers.  

Background to the changes

Following its work implementing changes to help drawdown customers make investment decisions, the FCA also wanted to improve outcomes for those in the accumulation stage of non-workplace pensions. 

Over the past few years, it has conducted some thorough research into this market and come up with some startling facts.

Put simply, the FCA wants customers to take a more active interest in their investment choices.

Not least is that the non-workplace pension market was worth £400bn in assets under management in 2018 and was continuing to grow.

The FCA expressed its concern, though, that many customers felt disengaged from their pension savings and struggled to make decisions, such as choosing an investment strategy.

The main aim of the new rules is to engender competition in the market and improve investment decision-making for customers. Put simply, the FCA wants customers to take a more active interest in their investment choices, and not to linger in cash.

The new default investment option

The FCA is asking providers to offer a new default investment option to non-advised customers.

This option is targeted at helping those who are unable or unwilling to engage with investment decisions or find it difficult to choose appropriate investments. 

Pension providers will have to offer the option to customers when they first apply for a non-workplace pension. 

Providers have to include the default investment option on any menu of investments.

Customers have to be offered – clearly and upfront – one single default option. It cannot be shown solely because the customer has filled in an investment questionnaire or used a filtering tool. However, details of other investments can be shown at the same time.