• AJ Bell chief executive Andy Bell has written to newly-appointed FCA chief executive Nikhil Rathi warning of the consumer dangers of proposed ‘investment pathways’ reforms
• Investment pathways*, due to be implemented in 2021, are designed to ensure people in drawdown do not hold cash for long periods of time
• Bell believes the current version of pathways proposals, while well-intentioned, are ‘fundamentally flawed’ and ‘will not deliver the customer outcomes the regulator has set out to achieve’
• He also warns they are a ‘mandate for providers to sell expensive in-house funds’ and ‘will have ambulance-chasing lawyers salivating’
• AJ Bell policy paper sets out key problems with pathways and outlines alternative approach
Andy Bell, chief executive of AJ Bell, comments:
“The FCA clearly has its hands full dealing with COVID-19 and I derive no pleasure from taking pot shots at an already overburdened regulator.
“However, where I see an intervention that so obviously risks causing real and lasting consumer harm I cannot simply stand quietly by and watch it happen, even though investment pathways are commercially attractive to firms like AJ Bell.
“The FCA’s investment pathways reforms, while well-intentioned, are fundamentally flawed and will not deliver the customer outcomes the regulator has set out to achieve.
A mandate for providers to sell expensive in-house funds
“Investment pathways risk funnelling people into investments that do not suit their needs or retirement priorities and are a mandate for pension providers to line their pockets by peddling their own in-house funds with little or no control on fund charges.
“Furthermore if, in the words of Warren Buffet, diversification is a great protection against ignorance, why on earth is the FCA mandating pension providers shepherd non-advised drawdown customers into a single investment solution based on the answer to one ambiguous multiple-choice question?
“The regulator appears to be conducting a huge experiment with thousands of drawdown investors without ever properly testing whether it will actually work in the way it intends.
“If investment pathways had been in place before the COVID-19 markets dip hit in March and April, providers would have faced a barrage of complaints from understandably angry customers who had lost money after it was suggested they put all their money in a single investment that subsequently fell by 10%-15%. The already uncertain lines between advice and guidance will become even more blurred and these customers will feel and claim they have been advised, when they haven’t.
“In fact, one of the main beneficiaries of these reforms will be ambulance-chasing lawyers, who will undoubtedly be salivating in anticipation of this opportunity being spoon fed to them by the FCA.
“As a provider, one of the real challenges is that the FCA has prescribed every step of the investment pathways process to the nth degree of detail, instead of adopting a principles based approach. The pension industry has to make these rules work with existing drawdown processes that vary significantly across the industry. That increases the cost to the industry and ultimately to customers.
“I was pleased the FCA saw fit to delay the introduction of investment pathways until 2021 as a result of COVID-19. The regulator now needs to re-engage with the industry to understand just how wide of the mark its initiative is from its target. Mr Rathi has the opportunity to refocus the FCA’s energies on solving the very real problems identified in the FCA’s Retirement Outcomes Review with targeted and proportionate measures in favour of the wrecking ball called Investment Pathways.”
*How investment pathways will work
Investment pathways were originally due to be introduced in August 2020 but, as a result of COVID-19, the implementation date has been pushed back to February 2021.
Under proposed rules, people who enter drawdown or transfer funds to a new drawdown account will need to be offered ready-made ‘investment pathways’ based on their answers to basic questions about how they plan to spend their retirement pot.
Pathways will also need to be offered to non-advised drawdown customers each time they make a subsequent investment decision.
This will also be the case for advised customers where the later investment decision was:
• more than 12 months after the transaction they were advised on, or;
• within 12 months of the transaction they were advised on and they have not confirmed that their personal or financial circumstances are unchanged since they received the advice.
The four investment objectives stipulated by the FCA for investment pathways are:
• Option 1: I have no plans to touch my money in the next 5 years
• Option 2: I plan to use my money to set up a guaranteed income (annuity) within the next 5 years
• Option 3: I plan to start taking my money as a long-term income within the next 5 years
• Option 4: I plan to take out all my money within the next 5 years