FCA Feedback Statement on effective competition in non-workplace pensions

The FCA's Feedback Statement FS19/5, published in July 2019, sets out the FCA's findings on the level of effective competition in the non-workplace pensions market and its proposals for addressing the issues identified. 

The FCA found:

• low levels of consumer engagement in choosing a pension scheme and in choosing investments with many consumers assuming they have selected a "standard" investment;
• low levels of consumer awareness of product charges;
• complex product charges making it impossible for consumers to compare charges between products and sometimes resulting in materially different charges for broadly comparable products;
• that consumers who joined a scheme before the FCA's Retail Distribution Review and have smaller pot sizes tend to be paying higher charges;
• there is little switching between pension products and price competition is weak.

The FCA also expresses concern that:

• cash featured among the top five most popular investments for several schemes particularly in SIPPs; and
• a minority of schemes have higher charges for customers who stop contributing.

The FCA sets out the following potential remedy proposals:

• a requirement for pension providers to offer one or more "investment pathways" with the aim of benefiting consumers who are not engaged with investment choices;
• a requirement to provide clearer information about total charges, including making greater use of "pounds and pence" charging figures; and
• standardising the way charges are presented to make them clearer and easier to compare, and possibly requiring such charges to be reported to the FCA to enable it to collate and publish the information.

The FCA is also considering measures to address charges that are poor value for money.

The FCA invited stakeholder feedback to be submitted by 8 October 2019.  It aims to issue a consultation on its simplification and disclosure remedies in the first quarter of 2020 and to issue papers on independent governance committee effectiveness and on a proposed value for money framework (developed with the Pensions Regulator) around the same time.  After considering the responses to these papers, it will consider next steps for measures on charges and issue a consultation if it decides to make rule changes.

FCA Policy Statement on extension of remit for Independent Governance Committees 

On 17 December 2019, the FCA published a policy statement and final rules and guidance on the extension of the remit of Independent Governance Committees (IGCs) of workplace personal pension schemes.  The remit of such IGCs is to be extended in two areas:

• a new duty for IGCs to consider and report on their firm's policies on environmental, social and governance (ESG) issues, member concerns and stewardship; and
• a new duty for IGCs to oversee the value for money of investment pathway solutions for pension drawdown.

The final rules and guidance will come into force on 6 April 2020.  IGCs will be required to report on their firm's relevant policies and on the value for money of the firm's proposed pathway solutions in the first IGC report that covers a period including the period on or after 6 April 2020.

FCA evaluation of Retail Distribution Review and the Financial Advice Market Review

The FCA is in the process of reviewing the impact of the Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR).  

The RDR was launched in 2006 with most of the rules it introduced taking effect in 2012.  Its aim was to establish a more resilient, effective and attractive retail investment market that consumers had confidence in and trusted.  The FAMR was launched in 2015 and built on the work of the RDR.  It looked across the entire financial services market to assess the accessibility of advice and guidance to help people with their financial decision-making.

In May 2019, the FCA published a Call for Input asking for feedback on its proposed approach to reviewing the RDR and FAMR, following which it published a summary of some of the main themes to have emerged, being:

• lack of access to appropriate services to help with financial planning, particularly for those with smaller amounts of money to invest.  Feedback providers commented that this problem has worsened in recent years with regulatory costs contributing to this;
• lack of clarity regarding the boundary between providing guidance and regulated advice.  This can result in some firms feeling unable to provide potentially useful information to consumers due to concerns that this might amount to regulated advice;
• a need for consumer education in financial planning issues to improve consumer engagement; and
• format of advice and guidance.  Many feedback providers said that consumers value face to face advice and that alternatives such as online services are less popular.  Others said that new forms of advice and guidance are reaching more consumers, but that more work needs to be done to incorporate technology into the market to help consumers.

The FCA plans to publish its final RDR/FAMR Review report later in the year.

FCA final rules on "investment pathways" for non-advised drawdown customers

In July 2019, the FCA published the response to its consultation and its final rules on "investment pathways" for non-advised customers who go into drawdown.  The consultation was prompted by FCA concern about the funds of non-advised drawdown customers being defaulted into cash in circumstances where this is unlikely to meet the customer's long-term objective (eg where the customer plans to hold the funds long-term and would be likely to achieve substantially greater returns by investing differently).

Under the new rules, the FCA will require larger drawdown providers to offer their customers "investment pathways" for at least two of the following four objectives and refer consumers to another provider's pathway solutions for any of the four objectives that they don't cover:

• the consumer does not plan to touch his/her money in the next 5 years;
• the consumer plans to use the funds to purchase an annuity within the next 5 years;
• the consumer plans to take his/her money as a long-term income within the next 5 years;
• the consumer plans to take out all his/her money within the next 5 years.

The FCA will impose less onerous requirements on "small providers", which it classifies as those with fewer than 500 non-advised customers a year entering drawdown.  Small providers will still have to present non-advised consumers with the objectives, but could refer them to another provider's pathway solutions or to the Money and Pensions Advice Service drawdown comparator tool.

The rule changes will come into force on 1 August 2020.

The FCA will also implement rule changes to ensure that consumers only hold their funds as cash if they make an active decision to do so (eg by prohibiting providers from pre-populating forms with a cash option) and to require providers to tell consumers what charges they have paid each year.

Changes to "wake-up pack" rules to go ahead

In October 2019, the FCA confirmed in its Handbook Notice No 70 that it would be going ahead with various proposed changes to the rules on open market option statements, commonly known as "wake-up packs", and the annuity information prompt.

The FCA has confirmed its change to the rules to avoid a pension provider having to provide a scheme member with a wake-up pack where the member has requested payment of his/her pension savings as a serious ill-health lump sum and that request has not been rejected.  The change took effect from 1 November 2019.

The FCA has also clarified the rules regarding when wake-up packs have to be sent, to accord with its policy intention that members should receive wake-up packs shortly after reaching age 50 and then generally at 5 yearly intervals until the member has fully crystallised his/her pension pot.  The rule change took effect on 1 November 2019.

The FCA has confirmed that it will proceed with its proposals to amend its "information prompt" rules so that where a member refuses to answer questions about their health and lifestyle, the firm will be required to generate a market leading annuity quote on a non-enhanced basis.  The requirement came into force from 1 January 2020.  The FCA is also amending its definition of "market-leading pension annuity quote" to reflect that this may not always be produced on a like for like basis with a firm's own quote. This will be the case where a firm obtains health and lifestyle information from a consumer but does not underwrite annuities on an enhanced basis, so does not use this information in sourcing their own guaranteed quote.

FCA guidance for firms on the fair treatment of vulnerable customers

In July 2019, the FCA published a consultation on guidance for firms on the fair treatment of vulnerable customers. "Vulnerable customer" is defined as "someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care".  The FCA considers the four key drivers of vulnerability to be health, life events (eg bereavement or relationship breakdown), low resilience (ie low ability to withstand financial or emotional shocks) and capability (eg poor or non-existent digital skills).

The draft guidance gives the FCA's view on what the FCA Principles applicable to regulated businesses require of firms whose customers include individuals who are actually or potentially vulnerable.  It is divided into sections covering:

• understanding the needs of vulnerable customers;
• ensuring staff have the right skills and capability;
• integrating the needs of vulnerable customers when designing products and services; and 
• monitoring and evaluating performance in relation to vulnerable customers.

The consultation has now closed and the FCA plans to issue a response in the first half of 2020.

Optimising the Senior Managers and Certification Regime: Policy Statement 19/20 and Feedback to CP 19/4

In July 2019 the FCA published its Policy Statement 19/20 on the Senior Managers & Certification Regime (SM&CR) setting out feedback to its Consultation Paper 19/4.  The Policy Statement made final the FCA's near-final rules on the extension of the SM&CR to FCA solo-regulated firms.  It also made final rules on a new Directory of individuals working in financial services.

The main changes to existing rules covered by the Policy Statement are:

• excluding the Head of Legal from the requirement to be approved as a Senior Manager;
• amending the criteria for firms to be classed as "Enhanced" to ensure that the criteria fit the FCA's intention as to which firms should fall within this classification;
• amending the scope of the Client Dealing Function to exclude an individual who has no scope to choose, decide or reach a judgement on what should be done in a given situation, and whose tasks do not require them to exercise significant skill; and
• extending Senior Manager Conduct Rule 4 (SC4) to all directors at UK "Limited Scope" firms.  SC4 requires Senior Managers to "disclose appropriately any information of which the FCA or PRA would reasonably expect notice".

The changes apply from 9 December 2019.

The Policy Statement says that banking firms and insurers can start submitting data for the Directory of financial services workers from around September 2019 and that all other firms can start submitting data as of 9 December 2019, following commencement of the SM&CR for solo-regulated firms.

FCA publishes Policy Statement and final rules on switching investment platform providers

In December 2019 the FCA published Policy Statement 19/29 setting out its final policy position following consultation and final rules on making it easier for consumers to move from one investment platform to another without liquidating their assets.  The new rules will require platforms to:

• offer consumers an in specie transfer for units in investment funds that are common to both platforms;
• request a conversion of unit classes where this is necessary to enable an in specie transfer to take place; and 
• ensure that consumers moving onto a new platform are given an option to convert to discounted units where these are available.

The new rules will come into force on 31 July 2020.

In its consultation, the FCA had suggested a ban on platform exit fees was likely to be appropriate.  The FCA says it is considering responses to the discussion questions on this issue and intends to issue a consultation in the first quarter of 2020.