AJ BellMay 14 2019

FCA warned against investment pathways for Sipp clients

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FCA warned against investment pathways for Sipp clients

In the letter Mr Bell, the chief executive and co-founder of investment company AJ Bell, called on the regulator to not make it a requirement for drawdown providers to offer investment pathways to all clients but instead focus this service on those who are 'disengaged' from their investments.

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.

This was 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 new rules will also apply to Sipp providers which have more than 500 non-advised clients going into drawdown each year, which some believe could see some operators more focused on advised consumers withdraw these services from the market.

Mr Bell wrote: "Most non-advised Sipp customers have a clear view of what their investment strategy already is, or will be, once they enter into drawdown and will not appreciate investment pathways appearing to be forced on them.

"Sipp scheme holders tend to put large amounts into their pension and therefore have a strategy of what investments they want to make with their money once they enter into drawdown."

Mr Bell explained that the journey for a non-advised Sipp customer entering drawdown was different from a customer with an insured personal pension and if AJ Bell were to change its non-advised drawdown process as proposed by the FCA this would create an "unwieldy customer journey".

Instead he has proposed that investment pathways are targeted exclusively at non-advised customers whose actions, or lack of, indicate that they are "disengaged".

Providers should not have to offer pathways until clients have remained invested largely in cash for a specified period of time after entering drawdown, which Mr Bell suggested should be three to six months.

But Andrew Tully, technical director at Canada Life, said: "Once companies start carving bits out of the FCA’s requirement to suit a particular client, soon everyone will start to follow suit and do the same.

"They must either follow the requirement and offer investment pathways to all non-advised clients as set out by the FCA consultation with the option for people to opt-out or there is no point in having investment pathways at all."

While Jon Greer, head of retirement policy at Quilter, agreed with Mr Bell that investment pathways should be focused on the disengaged, he warned that they should not put people off of seeking professional advice and building a tailored investment.

He said: "[Investment pathways] should not be seen as an alternative to making an informed choice and building a bespoke plan at retirement. Instead, they ought to serve as a back-up for those that don’t take action.

"We believe that the best option at retirement is to take advice, but there are also non-advised customers that want to build their own portfolio for decumualtion, for instance those using a Sipp.

"We would have concerns if investment pathways were positioned in such a way that they attracted customers at retirement who would otherwise have sought personal financial advice to navigate the complex issues."

Mr Bell, in his letter to the FCA, also warned that pathways could carry "significant risks" for individuals. This is because they are outcome focused and do not make an allowance for an individual's risk appetite.

"The customer’s risk appetite has also been a key pillar of the FCA’s suitability regime but for the purposes of the investment pathways, primarily for perceived simplicity, this appears to have been dispensed with," said Mr Bell.

Mr Greer warned that investment pathways should not be considered on their own, saying there were other issues to consider when planning for retirement.

He said: "The key thing to remember here is that while an investment strategy in decumulation is important, it isn’t the only thing that matters.

"Tax planning, budgeting, identifying spending and lifestyle habits and so on are all absolutely crucial and add huge value in retirement planning.

"It is important that investment pathways don’t draw consumers away from building a bespoke plan altogether."

The FCA's consultation on investment pathways closed on April 5, 2019 with the policy statement due in July.

amy.austin@ft.com