The Financial Inclusion and Markets Centre (FIMC) has responded to the FCA consultation CP25/17 Supporting consumers’ pensions and investment decisions: proposals for targeted support.
The response can be found here: ADVICE GUIDANCE CP27 17 FINANCIAL INCLUSION AND MARKETS CENTRE SUBMISSION 290825
Summary of our response
The FCA’s proposals are a cause for concern. We very much share the stated objectives of the FCA to help consumers make better financial decisions on pensions and investments. But, we are concerned that the FCA’s choice of intervention, targeted support, will not have the positive impact expected by the FCA. Targeted support would represent a weakening of consumer protection and limit consumer rights of access to redress. Targeted support has two key elements.
- It involves a moving of the regulatory boundary so that greater responsibility for poor outcomes is moved towards consumers away from firms, with a consequent reduction in consumer protection standards and access to redress. This is at a time when the FCA is removing the need for firms to have a Consumer Duty Champion. Not only are FCA consumer protection standards under threat, there is a risk that important direct marketing consumer protections may also be weakened.
- What is described as targeted ‘support’ with ‘ready-made suggestions’ is in effect an opportunity for firms to use mass market, electronic cold calling techniques to identify potential consumer-targets to sell, upsell, or cross sell products to. This is not a regime which would require firms to prioritise supporting consumers. It enables firms to prioritise selling to consumer-targets. We believe the real motive of the industry is to change the regulatory boundary to facilitate sales of greater volumes of higher cost, riskier products while reducing the potential liability for redress. The goal is to improve the risk/return trade-off for firms. The Consumer Duty would provide a limited backstop in this case as firms would now be operating within a redrawn regulatory boundary.
The FCA refers to ready-made ‘suggestions’. But, the FCA wants targeted support to have same impact as personal recommendations. So, we think describing this sales process as ‘suggestions’ has the potential to mislead consumers.
The FCA is further complicating an already complex market. Consumers will now have to differentiate between five different types of service – information only, guidance, simplified advice, targeted support, and holistic plus hybrid options – and understand the consequences of opting for those services, including the redress implications. This is on top of consumers being faced with a choice of literally thousands of pensions and investment products. It is difficult to see how this will enhance the effectiveness of consumer decision making. It is well documented that choice overload creates anxiety and undermines decision making.
Moreover, the targeted support reforms are unnecessary. The FCA already provides firms with permission to use innovative advice models to serve a wider consumer market. But, the crux of the matter is that firms do not trust themselves to use innovative advice models without breaching consumer protection standards. So, they asked for and have received a reduction in consumer protection standards and liability for redress.
We do not think that targeted support will do much to help consumers currently unserved or underserved by the market. Rather, it will enable firms to identify targets from the population of consumers with modest-high levels of assets to sell, upsell, or cross sell products to with reduced redress liabilities.
Not only is targeted support as currently presented likely to increase the risk of costly, suboptimal products being sold to targets, it is also likely to create competition issues. Large, vertically integrated firms including banks will have a significant advantage. They have what is in effect a captive market and access to data, to mine pools of potential targets to sell, upsell, or cross sell products to.
The FCA’s estimates of the size of the various consumer segments are very helpful in bringing to light just how ineffective the retail financial services industry has been in meeting the needs of the general consumer population. The FCA’s research demonstrates that: the market is unable to, or just not interested in serving millions of consumers; and there are millions of consumers at risk of poor retirement outcomes, overinvesting, or investing in inappropriately high risk investments.
The FCA’s theory of harm basically ignores the supply side causes of market failure such as embedded inefficiencies, and oversupply of products. The FCA focuses on consumer behaviours and conventional explanations of market failure such as information asymmetries to explain the harms identified. It also seems to have accepted the industry’s view that regulation is a barrier and burden which contributes to that harm.
The scale of market failure should have prompted a major regulatory intervention. The FCA had a choice. It could have chosen to make markets work, rather than weakening consumer protection to ‘encourage’ the market to deliver. The FCA could have chosen to achieve the stated goals through more proactive and robust application of the Consumer Duty Outcomes and making greater use of MoneyHelper and other non-profit sources of information. This would cause less disruption and less confusion, too, and would not result in a weakening of consumer protection standards.
Unfortunately, the FCA has chosen to design a system that suits the industry, not a system built around the needs of consumers. To add to the concerns, the investment industry is gearing up to launch a well-funded advertising campaign to promote the supposed benefits of investing in higher risk, higher cost investment products. Moreover, this campaign is supported by the FCA, HM Treasury, and the Money and Pensions Service (MaPS).[1]
At the same time, FCA and TPR are implementing the Value for Money (VFM) agenda which will allow the industry to divert attention from the importance of costs and elevate the importance of investment performance even though we know that future performance cannot be predicted from past performance.
In other words, potential targets will be softened up, though the advertising campaign, for the hard sell using targeted support.
The proposals in CP27/17 represent a further weakening from those in CP24/27. The recommendations we make in our response are very much about damage limitation. The FCA should:
- require firms to identify a nominated senior person to confirm to the FCA that targeted support is not being used irresponsibly and to report any issues.
- issue specific guidance on what constitutes value for money as part of the Consumer Duty.
- insert clear friction/ break points and cooling off periods into the targeted support process.
- require firms to ensure targets understand the segmentation process, assumptions made, and consequences for redress if they agree to be sold a product under targeted support.
- require firms to clearly communicate the impact of charges on investment growth and inform targets that better value options may well be available elsewhere and signpost targets to objective sources of information.
- prescribe the situations where targeted support can be used.
- prescribe what information firms should seek from prospective targets and require firms to verify that information.
- specify the types of circumstances in which firms are required to notify targets of changes to the products recommended during the original sales process, and what the range of actions the firms should take depending on the impact on the affected targets.
- require firms to notify the regulator when the products sold to target groups are being adapted along with the measures the firm intends to adopt to inform those affected of the potential impact of any adaptations and address the negative impact of adaptations.
- require firms to notify targets, not only of the changes, but the potential impact of changes.
- mandate the range of actions firms should take depending on the extent of the product changes.
- require firms to demonstrate that segmentation models and assumptions are robust and fair when applying for authorisation to use targeted support to sell products.
[1] Sasha Wiggins announced as Chair of UK’s retail investment campaign | Press Releases | The Investment Association