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Investment pathways rules deferred

Wednesday, July 8, 2020

Regular readers might recall that we wrote about the new rules around investment pathways last year. That article can be read here.

The rules were supposed to be effective on 1 August 2020. As a result of the current Covid-19 situation, this has been put back by six months to 1 February 2021.

The new requirements are being introduced primarily to help non-advised drawdown consumers to make investment decisions. The new rules and guidance require providers to:

  • introduce ‘investment pathways’ for consumers entering drawdown without taking advice;
  • ensure that consumers entering drawdown only invest mainly in cash if they take an active decision to do so;
  • require firms to send annual information on all the costs and charges paid over the previous year to consumers who have accessed their pension.

The FCA has also published guidance for Providers related to the current exceptional circumstances of risk factors they should watch out for and explore with clients if felt appropriate. Providers are not expected to advise clients, merely provide appropriate information. The risk factors include:

  • Sustainability of income in retirement;
  • Investment risk (in general);
  • Tax implications;
  • Charges;
  • Scams.


Implications for adviser firms
As we said in our original article, most of the impact of the rule changes will land on Providers but the FCA has reminded adviser firms of the obligation they will have, under existing rules, to consider available pathway solutions when they assess suitability for clients who are deciding how to invest drawdown funds.

When announcing the deferral of the effective date for the new requirements, the FCA also took the opportunity to remind advisers of their expectations around defined benefit transfers generally and aspects that might be Covid-19 driven, including: 

  • While it may be more difficult in the current crisis to get information about a clients’ personal or financial circumstances, or about their pension schemes or other investments, firms must not make a personal recommendation if they do not have all the necessary information; 
  • Firms should not assume that changes in circumstances due to the coronavirus make a transfer more likely to be suitable for individual clients; 
  • Firms should also address any misconceptions clients may have as a result of the crisis. For example, clients may think:

‘Cash equivalent transfers (CETVs) are at an all-time high’ 
Firms should not assume that increases in CETVs automatically improve client outcomes if a transfer proceeds. They should consider the client’s circumstances and attitude to transfer risk if DB schemes offer larger CETVs. 
‘Death benefits will be better in a DC scheme’ 
Firms must adequately consider how death benefits are provided by the DB scheme and the proposed DC arrangement throughout retirement. They should also consider alternative options, such as term life insurance, and any tax implications, especially if a client has a life expectancy of under 2 years. 
‘My employer is going under, so my pension scheme will too’ 
Firms are generally not experts in employer covenant assessments. So where clients have concerns about the sponsoring employer continuing in business, they must provide a fair assessment of the benefits of the Pension Protection Fund. 

  • Firms may also see more clients who want to transfer against advice they received before the crisis. In these cases, firms should consider whether the client’s circumstances have changed and if it is appropriate to re-visit the advice. In particular, they should consider how the risks of proceeding to transact may have changed since the client was given the original advice.  Firms should retain records of the advice and transaction process they followed.

Our View

For information.

Action Required By You

  • Firms should review advice processes before February 2021 to ensure that the requirement to consider investment pathways is addressed;
  • Contact ATEB if you want further assistance.