Advice or guidance? The challenges facing trustees

The majority of consumers receive too little support with their financial decision making and this negatively impacts their financial resilience and living standards, especially in retirement.

Common problems experienced include consumers having too much of their savings in cash, contributing too little into their workplace pensions, not consolidating, or withdrawing in drawdown at unsustainable rates. 

To solve these problems, and to respond to long-running concerns about the advice-guidance boundary, two major proposals have been outlined by the Financial Conduct Authority and the government in the recent discussion paper, DP23/5, as part of the ongoing Advice Guidance Boundary Review.

These two proposals are:

• Targeted Support: A service where firms could use limited information held about their customers within particular target markets to suggest products or courses of action (including in pension decumulation) that would be generally appropriate to people within that target market.

• Simplified Advice: A limited form of one-off advice, focused on a specific need, which could be considered suitable without analysis of a customer’s full circumstances.

The ABI is supportive of both proposals, in particular Targeted Support. Recent research we have published suggests that this type of support can be very effective at improving customer decision-making and therefore consumer outcomes.  

Questions, questions

However, there remain some unanswered questions.

These include how the proposals might be relevant to trustees of occupational pension schemes, especially in the context of the Department for Work and Pensions’ (DWP) for a duty on trust-based schemes to offer decumulation services to all their members.

The FCA argues that rights under occupational pension schemes are not investments for the purposes of the ‘advising on investments’ regulated activity, so the boundary is not generally relevant for trustees. But what happens when a trustee uses data about their members to help steer a member toward an FCA-regulated product as part of a partnering arrangement? Would that trustee be breaking FCA’s advice rules for non-authorised persons without the permissions under targeted support to offer this tailored support?

In addition, how does this tally with the requirements of Consumer Duty that apply to FCA-regulated firms providing services to trustees, with scheme members seen as ‘retail customers’ under the Duty?

Putting this more nuanced point aside, to what extent will targeted support by FCA-authorised firms and the DWP’s duty on occupational pension schemes lead to further inconsistency of consumer outcomes and experiences at decumulation between occupational and personal pension schemes?   

Other challenges

The Privacy and Electronic Communications Regulations (PECR) and the Information Commissioner’s Office’s direct marketing guidance together provide another challenge for the success of the new proposals.

Targeted Support looks to enable firms to offer product suggestions and courses of action to help customers that fit within particular target markets to avoid foreseeable harm and better achieve their financial objectives. But the ICO’s direct marketing guidance establishes that a message is likely to be direct marketing if it “actively promotes or encourages people to make use of a particular service, special offer, or upgrade”.

In addition, section 22 of the PECR states that unsolicited electronic communications for the purposes of direct marketing cannot be sent unless the recipient has consented to receive marketing communications.

Therefore, firms face an uphill battle to provide targeted support over email, chatbot, or video messaging service to anyone within a target market that has not provided consent to direct marketing, even where that firm has robustly determined that the customer would very likely benefit from taking the actions set out. This impacts automatically enrolled customers who do not have the opportunity to provide marketing consent.

The question is: how to get around this blocker, keeping consumer outcomes front and centre?

In a positive step, the Pensions Regulator recently indicated that it is working closely with DWP, FCA, ICO and others to determine whether further guidance or legislative change is needed to provide greater clarity on the form of communications that can take place without the need for marketing permissions.

Suitability

The liability question also looms large.

The primary risk associated with both the Advice Guidance Boundary Review’s solutions is ultimately that consumers may receive suggestions that are not appropriate for their circumstances but will act on these suggestions as if they are a personal recommendation.

Therefore, the standards and disclosure requirements the FCA sets for both solutions must mitigate this potential harm while simultaneously providing firms with the confidence to innovate and introduce new propositions that can tackle the lack of support currently experienced by consumers. Suggestions given as part of a targeted support regime would not need to be ‘suitable’ to the standard of financial advice, but what should the repercussions be for providing ‘bad’ targeted support?

For simplified advice, how prescriptive and rules-based will the narrower fact-find and suitability assessment need to be to ensure firms can offer one-off simplified advice without it being interpreted as unsuitable? For any new regime, published examples of how the Financial Ombudsman would adjudicate scenarios or types of communications would be welcome. 

These aren’t easy questions to answer, but they will have to be tackled to ensure these proposals make sense for firms and produce better outcomes for consumers. The collaborative approach taken to date – between government, regulators, consumer groups and industry – gives us the best chance of answering them.

George Ritchie is senior policy adviser for long-term savings at the Association of British Insurers.