In its latest publication under the Advice Guidance Boundary Review, the FCA is consulting on the new concept of targeted support for those needing help with pensions decisions.
A further consultation, with draft rules, is expected in the first half of 2025. It will provide more details around applying the same targeted support framework to both pensions and retail investments.
In this article, I will examine the key proposals around targeted support, initially for pensions, and explore the various ways this could be relevant to advisers.
Background
The FCA wants people to be able to access the right support, at the right time, at a cost they can afford. As well as targeted support, the FCA also plans to consult further with adviser firms around simplified advice. There's widespread hope that targeted support is the measure most likely to move the dial on shrinking the persistent advice / support gap. Furthermore, the Government sees targeted support as aligned with its growth agenda.
The FCA has chosen to focus on pensions first because of the significant need for extra support amongst millions of non-advised auto-enrolees, both in accumulation and at the retirement and decumulation stages. However, the consultation does have some wider questions and the FCA encourages responses from those outside the pensions field.
Targeted support framework
The consultation sets out a framework within which targeted support will operate:
- Scenarios: firms will first identify and pre-define scenarios in which they believe targeted support will be beneficial.
- Consumer segments: they’ll then pre-define relevant consumer segments (groups of consumers with common characteristics) within each scenario.
- Ready-made solutions: then, firms will provide the same suggestion of a course of action to all consumers in the same segment.
1. Scenarios
The FCA is not planning to define which scenarios are appropriate for targeted support, but the consultation suggests a range including:
- Groups of auto-enrolees who may be contributing inadequately
- Those unsure about making retirement income decisions
- Those who may be drawing unsustainable amounts from their drawdown policy
- Those whose investments may be inappropriate
- Those who may be holding too much in cash
- Pensions consolidation
- Those fully encashing their pensions or taking other actions likely to be inefficient from a tax perspective
The consultation also suggests targeted support could be used to provide greater personalisation and tailoring in delivering investment pathways to non-advised drawdown customers.
2. Consumer segments
These will be built around firms identifying groups of consumers with ‘common characteristics’. The phrase ‘people like you’ didn’t test well with consumers. The FCA won’t prescribe how granular the segments need be, but they shouldn’t be overly individualised as this would approach personalised advice.
Firms will be able to ask a customer if they would like to answer a limited number of questions so they can receive targeted support. This will help verify a customer is in a segment but must not be at the level of a full fact-find.
3. Ready-made solutions
The ‘ready-made’ suggested course of action can relate to an existing product, a new product type or perhaps also a new specific investment product. There will be an exception for annuities – while suggesting an annuity as a means of accessing retirement income is fine, the FCA sees suggesting buying a specific annuity as too close to advice.
The following FCA example indicates suggestions can be quite specific:
'We suggest an initial drawdown rate of 3.0% a year for an income that could be increased with inflation each year. This suggestion is based on a rate which is considered appropriate for people in similar circumstances with similar needs as you: early 60s, who want their pot to last their lifetime, where the pot is invested in a medium-risk fund, with charges in the range of 0.5%-0.75% a year.'
This means targeted support services will be very much pre-set and standardised. Firms won’t be able to offer a new, tailored targeted support service in real time in response to a non-set customer query.
Will advisers offer targeted support?
The FCA believes it's more likely to be manufacturers such as pension providers, life companies and D2C platforms which offer targeted support. The FCA says advisers may find it practically difficult to offer targeted support without this being confused with advice. Specifically, it's consulting on an adviser firm not being allowed to offer targeted support to an individual who they're providing advice to – which would seem unlikely in any case.
However, at Aegon, we’re very keen that the FCA keeps the option open to adviser firms who want to offer this new service to complement existing advice offerings. One example might be an adviser firm supporting an employer client with auto-enrolment. Here, targeted support might be a means of supporting members for whom holistic advice is not affordable. Post Consumer Duty, advisers may also have clients who they can no longer offer holistic advice to but for whom targeted support might offer a way forward.
As the details emerge, adviser firms may wish to consider if they see opportunities. My take on the proposals is that targeted support is more likely to be viable where a firm has a sufficiently large scale and customer base to identify where advice is not viable, develop the services, and identify customer segments.
But even if an adviser firm has no plans to offer targeted support, they'll want to understand how this will work, including where it is likely to prompt more individuals to ‘step up’ to full advice. Whenever targeted support is offered, the alternative of full holistic advice will be signposted.
An outcomes-based approach
The FCA is primarily relying on the outcomes-based Consumer Duty and is seeking to limit any new prescriptive rules or guidance to areas where firms may need more confidence or where there is a particular need to protect consumers.
In line with Consumer Duty, firms should consider testing understanding ahead of issuing communications, collect data to demonstrate good outcomes, ensure value and allow for vulnerable customers.
The FCA is openly accepting that the outcome of targeted support will not always be as optimal as if advice had been received but sees this as an acceptable trade-off to deliver scalable support. As a test, firms should ‘have reasonable grounds for believing that the delivery of targeted support suggestions would deliver a better outcome for customers than if targeted support was not provided’.
If a firm can’t align a particular customer with a segment, or has other information which makes it believe that a customer wouldn’t benefit from targeted support, then it mustn’t provide it.
Other regulatory requirements
To make sure targeted support is delivered in a suitable way, firms offering it will need certain regulatory permissions. The FCA and Treasury are considering three options: a new permission, a subset of advice permissions, or linking to holding permissions to offer the relevant products (in this consultation, pensions). As many manufacturers don’t hold advice permissions, the second option doesn’t look workable if the FCA wants widespread adoption.
While not ruling out charging for targeted support, the FCA is focusing on it being offered free of explicit charge. They accept this may result in cross-subsidisation within firms.
The FCA wants to make sure customers understand the service they're receiving and don’t confuse this with holistic advice. They're proposing disclosures on first contact, when gathering further information from the customer, and when providing the ready-made solution.
Next steps
This consultation on high level principles closes on 13 February 2025. The FCA will then reflect on responses before issuing a further consultation, covering both pensions and retail investments, in the first half of 2025. At that point, the FCA will consult on draft regulations.
It’s very encouraging to see the FCA continue to stress that financial advisers have a critical role to play. Targeted support has a role to play, but will not offer the level of personalised support that holistic advice provides. It’s also good to know that the FCA will be speaking to advisers during 2025 to understand the appetite for developing a simplified form of advice.