Redrawing the line between advice and guidance

The discussion paper acknowledges that, for many pensions professionals, including trustees of defined contribution (DC) occupational pension schemes, the existing regime has sometimes constrained the support and services they are able to provide.

Can the three proposals presented in the discussion paper address this – and what further clarity must the regulator provide?

For trustees considering steering a member of an occupational pension scheme towards an regulated product (as opposed to supporting members with respect to the options available solely under their scheme), further clarification of the advice/guidance boundary is vital in paving the way for uniform application across the sector.

Previous guidance from the Pensions Regulator (TPR) and the Financial Conduct Authority (FCA) guidance issued in 2021 tried to plug this gap, but still left trustees to determine for themselves the line between information and promotion or advice.

Proposal one in the recent discussion paper could target this. Given the Department for Work and Pensions’ (DWP) concurrent work, which seeks to help pension savers understand their pension choices at the point of decumulation, the risk of trustees being faced with varying requirements cannot be ignored.

The FCA’s intention to work closely with the DWP as their respective work progresses is therefore a positive and necessary step. However, regulatory alignment must remain front and centre for both parties. 

Targeted support

The second proposal, creating a targeted support regime sitting between guidance and regulated advice, has the potential to shift the dial in terms of consumer outcomes, and has seen support from industry.

But much hangs on its implementation – and several important questions remain unanswered.

How could the new regime cater to those who have not “opted in” to receive direct marketing, for example? This could be a particular issue in the case of auto-enrolled customers.

Would a firm’s existing target market assessment or segmentation processes be sufficient for the purposes of determining a customer’s target market when offering targeted support? And what repercussions could firms face if they misjudge a customer’s target market or provide support which is not suitable to that customer?

Suitability, in the targeted support context, is not intended to be the standard of suitability under the advice regime – drawing this line won’t be easy.

How should the regime be structured to give a clear regulatory framework while not precluding occupational pension scheme trustees from offering targeted support? To do so could otherwise risk occupational and private pension scheme customers facing inconsistent experiences (and therefore outcomes), especially with regard to decumulation. It is also at odds with the FCA’s objective of supporting many more mass-market consumers.

These are just some of the issues that the FCA must grapple with.

Is simplified advice really simple?

What of the FCA’s third proposal, for a simplified form of one-off advice focused on specific need without an analysis of a customer’s full circumstances?

In principle, this seems a positive step. However, firms will need far greater clarity in order to properly assess how commercially viable it would be to make a “simplified advice” offering that also delivers value for money to customers.

As identified in the Society of Pension Professionals’ (SPP) recent response to the discussion paper, a key industry concern is whether the regulator can provide adequate regulatory certainty for firms to enable sufficient differentiation of their processes for providing “simplified advice” from those in place for “advising on investments”.  

In March 2024, the FCA confirmed that the advice guidance boundary review will be one of its main priorities over the next 12 months so firms should not have long to wait for answers to some of these questions.

The ultimate challenge for the FCA is to ensure that the standards it sets mitigate against the risk of customers treating any suggestions as a personal recommendation, regardless of whether they fit their personal circumstances, while also providing firms with the confidence they need to make changes that tackle the existing gap in consumer support.

Further engagement with stakeholders, as has been promised by the FCA, will be vital in developing both workable and effective policy proposals, and this is certainly something the pensions industry stands ready and willing to help with.

Premlata Fagan is a member of the SPP’s financial services regulation committee and a managing associate in the financial regulation team at Linklaters.