On 1 October 2015, the Financial Conduct Authority (FCA) published a detailed consultation paper (CP15/30 - 139 pages) on the changes it proposes to make to its rules and guidance in the light of the new pensions environment allowing savers to access their pensions funds flexibly once they reach age 55.
The consultation closes to responses on 4 January 2016, although those who wish to comment on the shape and scope of the retirement outcomes review are invited to do so by 30 October 2015.
Over the past six months, the FCA has been reviewing its existing pension rules and guidance against its operational objectives. In CP15/30, it:
- sets out its expectations about how its existing rules and guidance operate in the new flexible environment, providing illustrative examples;
- brings forward proposals for further changes to the FCA Handbook, to address the risks and challenges faced by consumers in the new retirement market;
- requests views on the range of information it intends to examine under a new retirement outcomes review, to be launched in early 2016; and
- invites discussion on areas where it is minded to carry out further work.
The proposed rules are set out in a draft version of the Conduct of Business (Pensions Supplementary Rules) Instrument 2015, which is included as Appendix 1 to CP15/30.
The FCA will consider the feedback received to CP15/30 and publish final rules in a policy statement at the beginning of the second quarter of 2016. For the areas where the FCA is seeking views with the intention of developing regulatory policy, the FCA’s next steps will be outlined in this policy statement.
In relation to the retirement outcomes review (set out in Annex 2 to CP15/30), the FCA will consider the feedback received before publishing the terms of reference and launching the review.
The FCA is aware that the market is still adapting and developing in the light of the pension reforms introduced by the government and through the consequential changes to regulation. It will continue to monitor the market and, where necessary, consider further changes to the FCA Handbook as a result of market developments.
Summary of the FCA’s proposals
The FCA's key proposals in CP15/30 fall into the three categories below, which replicate its operational objectives:
- Promoting competition
- Communications concerning accessing pension savings. The FCA proposes additional guidance to ensure that, in the new pensions environment, firms understand the FCA’s requirements when communicating with their customers about accessing their pension savings. It also proposes additional rules and guidance requiring timely, relevant and adequate information to both encourage consumers to explore the full range of options for accessing their pension savings, and to enable informed decision-making about their options for accessing pension savings at retirement and beyond.
- Pension freedoms communications. The FCA proposes to make new rules on the methodology for providing illustrations to members wishing to access their pensions flexibly, including adding guidance to set out the type of ongoing information consumers are provided with once they start accessing their pension savings but still remain invested. It also proposes to extend the rules and guidance in chapter 9 of the Conduct of Business sourcebook (COBS) to uncrystallised fund pension lump sums (UFPLS).
- Self-invested personal pension (SIPP) retained interest. The FCA proposes to clarify that SIPP retained interest charges should be included in projections and charges information.
- Ensuring the market works well
- Design and distribution of retirement income products and facilities for accessing pension savings. The FCA proposes to remind firms of their obligations regarding the operation, distribution and communication of existing products, as well as when developing new products. It intends to set out some example scenarios to help firms in this area.
- Retirement risk warnings. The FCA proposes to retain its rules on the retirement risk warnings. It also proposes to remove the requirement for a firm to go through the question and answer process of the rules when a consumer has a pension pot of £10,000 or less and where there are no safeguarded benefits. In this situation, firms will still be required to give appropriate risk warnings.
- Protecting consumers
- Cancellation rights. The FCA considers that the way in which its rules apply in the new pensions environment has not changed and, in many cases, cancellation rights will apply because an existing contract is being varied or a new contract put in place. CP15/30 explains that the FCA believes the risk that a consumer enters into an arrangement whose features, risks and consequences they do not fully understand should be mitigated by other measures, for example the availability of guidance from Pension Wise and the retirement risk warning rules.
The FCA will monitor the market and, where necessary, take action. It welcomes views from stakeholders as to whether its cancellation rules expose some consumers to risks that are not appropriately mitigated and how the FCA might reduce those risks and improve consumer outcomes.
- Restrictions on the promotion and distribution of high risk investments. The FCA proposes to amend its “high net worth investor” (HNWI) and “restricted investor” (RI) certification criteria so it is clear that:
- lump sum pension withdrawals, that are not intended to serve as income in retirement, are expressly excluded from the HNWI income criteria; and
- net investable assets for the purposes of HNWI and RI certification excludes money released as cash from pensions (in addition to current exclusion of money held in pensions), where it is not intended to serve as income in retirement.
- Using pension savings to repay debt. The FCA proposes to add Handbook guidance to make explicit the application of existing rules in the Consumer Credit sourcebook (CONC), in the context of pension reforms, particularly in relation to debt collection and debt advice. It will also remind debt collection and advice firms that advising on the conversion or transfer of pension benefits is a regulated activity.
- Attachment orders. The FCA proposes to add Handbook guidance for providers and advisers on pension attachment orders following divorce or dissolution of a civil partnership.
- Determining maximum projection rates. The FCA proposes to standardise the methodology for determining maximum projection rates.
- Projections including guarantees. The FCA proposes to require firms to show contractually obliged future values in projections, including Guaranteed Annuity Rates.
- Projecting a future annuity: mortality assumptions. The FCA proposes to update references in its rules to the 2008 mortality tables and proposes that, in future years, firms use the improvement factors published the previous year.
- Glossary amendments. The FCA proposes to amend the Glossary definitions of “income withdrawals”, “short-term annuity” (and, by consequence, “drawdown pension”) to ensure its rules align with relevant legislation.
Areas where the FCA is minded to carry out further work
The FCA welcomes comments on the following areas, where it is minded to carry out further work:
- remuneration for arranging the sale of non-advised annuity purchases;
- reminding firms of their responsibilities to ensure lifestyling investment strategies remain appropriate in the new environment and to provide customers with sufficient information to make an informed decisions on their investments;
- updating FCA rules on transfer value analysis;
- possible future changes to the FCA's key features illustrations and existing business projections or other information prepared; and
- the degree of Financial Services Compensation Scheme protection afforded to consumers who choose to invest their pension savings in non-insurance based products, as compared to the protection provided to those who invest through a life insurance contract.
Retirement outcomes review (Annex 2)
Annex 2 to CP15/30 outlines the scope and aims of the retirement outcomes review the FCA intends to carry out, to build on the work of its retirement income market study published in March 2015, which identified a number of risks to consumers making good decisions on a product or strategy to generate an income from their pension savings.
The FCA is keen to understand whether these risks have become more or less acute in the new pensions landscape and to examine these risks through its retirement outcomes review.
The first six months of post-reform market data will be used to inform the FCA’s view of how the pension reforms have affected the market in practice. Its initial thinking is that the review is likely to consider issues such as product innovation and charging structures, and the impact of the reforms on competition and switching in the market, including whether they have reinforced the grip of incumbent pension providers in the market.
The key issues for the review that the FCA has identified are:
- product options, features, charges and access;
- consumer decision making; and
- impact of advised and non-advised distribution channels.
The FCA plans to launch the retirement outcomes review in early 2016, with the publication of the terms of reference. The key measurements will include product choices made by consumers, product charges, new and planned product options, sales by distribution channel, market shares and firm marketing data.
Before publishing the terms of reference and launching the retirement outcomes review, the FCA will be meeting interested stakeholders and seeking written comments on the possible shape and scope of the review. Comments should be provided by 30 October 2015.
Having considered feedback received, the FCA will publish final rules in a policy statement at the beginning of the second quarter of 2016. For those areas where the FCA is seeking views with the intention of developing regulatory policy, the FCA will outline its next steps in this policy statement.
In relation to the retirement outcomes review, the FCA will consider the feedback received before publishing the terms of reference and launching the review in early 2016.
The FCA is aware that the market is still developing and it will continue to monitor the market and, where necessary, consider further changes to the FCA Handbook as a result of market developments.
A table on page 13 of CP15/30 indicates that the FCA intends that final rules and guidance will come into effect within various time-frames between 0 – 12 months, once the final rules made by the FCA board and the policy statement have been published.