FCA’s Advice / Guidance Boundary Review – implications for workplace pension schemes

The Government and FCA are looking to build an advice and guidance framework which consumers can trust, recognising the complexity faced by consumers in making financial decisions. Last week, the FCA published its policy paper DP 23/5 on the advice/guidance boundary review with proposals for closing the “advice gap”. The FCA’s review works in conjunction with, and is an important element of, the DWP’s intentions for decumulation set out in its recent consultation response. The DWP intends to place duties on trustees of occupational pension schemes to:

• Offer a suite of decumulation products and services which are suitable for their members and consistent with pension freedoms, either through a third-party provider or in-scheme.
• Provide a default retirement solution for members who access their savings but do not make an active choice about what to do with them.

The DWP proposals mean that the advice/guidance boundary is a key consideration for trustees and providers. In line with proposals, trustees would need to ensure their default retirement solution is accompanied by clear and consistent member communications setting out the implications of not making an active choice, but which do not stray into financial promotions.

Where trustees provide decumulation products and services through partnership arrangements outside their occupational pension scheme, they will need to consider the advice/guidance boundary carefully and ensure they are not engaging in arranging investment activities.

Pension trustees have consistently raised the issue of the advice boundary constraining the support they can provide to members and the FCA is specifically requesting feedback from trustees on its policy paper in light of DWP’s decumulation proposals.

FCA’s options to address the “advice gap”

The FCA identifies the “advice gap” as a situation where consumers may miss out on the value that support can provide. Broadly, it is the gap between (i) information and guidance as an impartial service which sets out options for consumers; and (ii) holistic advice which provides consumers with a personal recommendation based on comprehensive information about a consumer.

The FCA has proposed three options to fill the advice gap:

1. Further clarifying the boundary to enable FCA authorised firms to operate closer to the boundary

• The FCA’s research shows that authorised firms are hesitant to provide greater support to consumers in case they provide a personal recommendation, which requires greater regulatory permissions. The FCA believes there are several scenarios where it could explore whether it is possible to provide greater certainty for firms, for example - a pension provider warning a consumer about their withdrawal rate potentially being unsustainable by explaining for how long the pension pot may last at that withdrawal rate. The FCA is looking at expanding its non-handbook and perimeter guidance and simplifying existing guidance to provide greater clarity.
• This approach feels consistent with the ‘cash warnings’ requirement that was introduced for non-workplace pension schemes earlier this month, where providers have to prepare an illustration showing how inflation erodes the value of cash investments.

2. Targeted support (potential for no explicit charges): new regulatory framework that enables firms to use limited information to suggest products or a course of action based on “people like you” and target markets

• The FCA is exploring a new type of support – “targeted support” – designed to help consumers who might need help beyond information or guidance, regardless of their financial circumstances. Targeted support could operate to a different standard to holistic advice and enable firms to use limited personal information about a customer and their circumstances to help consumers make an informed decision based on a target market they are identified as belonging to. Firms could offer targeted support without upfront fees but with disclosure of how the consumer is paying for the service through associated charges.
• Consumers would need to make a clear positive choice to receive targeted support and understand how it is separate and distinct from holistic advice. Targeted support could be offered to support wealth accumulation decisions or wealth decumulation decisions and be offered on a target market, less bespoke level than simplified and holistic advice.
• The FCA suggests that the concept of defining a ‘target market’ for the support could be developed from the product governance rules that already apply to non-workplace schemes (for example, for Investment Pathways and default investment options for retail pensions). It would also have to be consistent with the Consumer Duty rules, which do not currently apply directly to non-authorised pension trustees.

3. Simplified advice (explicit charges): new advice regime enabling firms to provide a simplified form of advice, taking into account relevant data information only about a specific consumer’s needs

• The FCA is exploring a solution which enables consumers to get access to simpler and cheaper financial advice. Simplified advice would be a limited form of one-off advice, which is focused on one specific need and does not involve analysis of a consumer’s circumstances that are not directly relevant to that need. Simplified advice would result in a recommendation that is personalised to an individual consumer’s circumstances – i.e. “you specifically” would benefit from this action – as opposed to the targeted support based on “people like you” or holistic advice which takes into account potentially comprehensive information about a consumer and might involve an ongoing service.
• The FCA uses the following as a potential example of simplified advice: “A consumer has never reviewed the funds they are invested in. They feel that their attitude to risk has changed over the years. So, they approach a firm offering simplified advice, who will review the funds and recommend suitable alternatives”. However, it has specifically excluded pension decumulation decisions from simplified advice on the basis these are financial decisions which may typically be too complicated to incorporate into a simplified advice regime because of the income tax and inheritance tax planning implications.

Specific considerations for pension scheme trustees

Non-authorised trustees need to consider the regulatory boundary in relation to: (i) the activity of giving advice on investments; (ii) the merits of buying or selling a particular investment; and (iii) engaging in arranging activities through its communications.The FCA is clear in its policy paper that the advising on investments boundary is not relevant for trustees where they are only considering the support they can provide to members about the options available under their scheme.

The boundary may become relevant if trustees are steering a member towards a FCA-regulated product because that would be a specified investment for the purposes of the advising on investments activity.

However, the FCA says that trustees would only cross the boundary if they receive a “commercial benefit” for helping members. For example, where the firm that provides a financial product offers the employer commission. Trustees do not normally receive any commercial benefit and in most cases pension trustees and employers should be able to help members without needing to be authorised (see paragraphs 7.2-7.4 of the policy paper).

Critically, the FCA recognises that the services master trusts offer are much closer to financial services when compared to a traditional single-employer pension scheme; it is working with the Government and the Pensions Regulator to understand how the proposals may affect FCA-authorised firms sponsoring a master trust where that group provides support to customers across different pension types.