Investment pathways to improve retirement outcomes and 12 months of MiFID: This week in regulation


The speed read

  • FCA looks to introduce investment pathways and other measures to improve retirement outcomes 
  • Reporting general insurance value measures
  • LIBOR transition and contractual fallbacks
  • Cross-border innovation pilot launched
  • Encouraging effective stewardship
  • Consultation on the FSCS Management Expenses Levy Limit (MELL) launched   

FCA looks to introduce investment pathways and other measures to improve retirement outcomes

As part of its ongoing work to ensure consumers are receiving appropriate retirement outcomes, the FCA has published a number of proposals to encourage greater consumer engagement and select the most appropriate options.

The regulator’s Retirement Outcomes Review (ROR) highlighted that consumers were not sufficiently engaged in the investment decisions required when moving into drawdown and some providers were defaulting customers into cash, or cash-like assets, as a result. The FCA estimates that more than half of consumers in this situation are likely to be losing out on income.

The regulator believes that introducing a range of investment pathways would be the most appropriate way to help consumers choose options that broadly meet their objectives. The FCA is proposing that providers offer investment pathways when a consumer moves all or part of their pension into drawdown, or when they transfer funds already in drawdown, and have not taken advice in either of these cases.

The consultation outlines four objectives that providers should introduce investment pathways for, with one investment solution for each:

  • Option one: I have no plans to touch my money in the next five years
  • Option two: I plan to use my money to set up a guaranteed income (annuity) within the next five years
  • Option three: I plan to start taking my money as a long-term income within the next five years
  • Option four: I plan to take out all my money within the next five years.

All drawdown providers which serve non-advised consumers will be required to offer investment pathways, with the exception of provider which have fewer than 500 non-advised consumers a year entering drawdown. Larger providers will be required to offer pathways for at least two of the four objectives and refer consumers to another provider where they do not offer a pathway for their chosen objective.

The FCA proposes that providers will have 12 months to implement the investment pathways and make the necessary governance changes from the date the finalised rules and guidance are published.

To complement these proposals, the FCA has also published its final rules around ‘wake-up’ packs, retirement risk warnings and reminders, following CP18/17. Industry feedback was broadly supportive of the regulator’s proposals, so the final rules are largely unchanged.


Reporting general insurance value measures data

Following the piloting of the quarterly publication of data on general insurance (GI) value measures to help assess value for money, the FCA is proposing to introduce value measures reporting across the GI industry and broaden the scope to include additional measures to highlight where a customer has complained as part of the claims process.

The pilot has had a positive impact in the market, helping to improve transparency and awareness of how to assess the value of GI products, giving firms a metric to benchmark their products’ performance against.

The FCA is proposing to:

  • Apply the value measures reporting requirements to all GI products, with the exception of no-claims bonus protection, packaged bank accounts and commercial products
  • Make insurers responsible for reporting value metrics, even for products excluded from the Regulated Activities Order (RAO)
  • Require insurers to report on claims frequency, acceptance rate, complaints made as part of the claims process and the average claim payout
  • Introduce new provisions in its product governance rules to make providers take value measures into account when determining whether their products deliver value for customers.

The reported data will be published on the FCA website.


LIBOR transition and contractual fallbacks 

In a recent speech, the FCA’s Director of Markets and Wholesale Policy Edwin Schooling Latter discussed what he believes the final transition away from LIBOR may look like.

LIBOR is coming to an end, with an agreement between 20 panel banks to continue submitting until the end of 2021. However, Mr Schooling Latter highlighted that, at a previous conference in 2018, an audience poll showed more than 50% believed LIBOR would stop before the end of 2022. Contractually, this has significant implications, particularly for how the ‘fallback’ language in outstanding contracts that reference LIBOR should be applied.

Cessation of the publication of the rate is one reason to have effective fallback provisions, but firms may also wish to include a fallback that provides an alternative rate if LIBOR no longer offers an accurate representation of the market.

Last year the markets made significant progress in calculating a fallback rate that could replace LIBOR in outstanding contracts. Industry consensus is that the term elements of LIBOR should be replicated by the compounding of the observed overnight rates identified as substitutes for sterling, yen and Swiss franc LIBOR (SONIA, TONA and SARON).

The FCA believes that for the transition to be smooth and orderly, contracts that reference LIBOR should be replaced or amended before fallback provisions are triggered. That said, having the right fallback measures in place offers an important safety net.


Cross-border innovation pilot launched

The Global Financial Innovation Network (GFIN), currently chaired by the FCA, has launched a pilot for firms looking to test innovative financial services products, services or business models across multiple countries or jurisdictions.

Firms interested in applying are advised to review the list of participating regulators and submit an application to each jurisdiction they would like to test their solution in. The deadline for applications is 28th February 2019.

More information about the GFIN, including member organisations and a list of the regulators supporting this pilot, can be found on the FCA website.


Encouraging effective stewardship

The FCA is exploring new methods to encourage more effective stewardship in the interests of investors. In conjunction with the Financial Reporting Council (FRC), the regulator has issued a discussion paper designed to stimulate debate on what constitutes effective stewardship, what the minimum, and aspirational, standards should be and these could be achieved.

The FCA has also published a consultation paper to implement the provisions of the amended Shareholder Rights Directive (SRD II) for FCA-regulated insurers and asset management firms. Assuming a transition period with the EU is agreed, this directive will come into force in June 2019 and will need to be transposed into UK law.


Consultation on the FSCS Management Expenses Levy Limit (MELL) launched

The FCA and PRA have launched a joint consultation on the FSCS MELL, which ensures the scheme has adequate funding to meet its objectives.

The proposed MELL for 2019/20 is £79.6 million, which includes a budget of £74.6 million and an unlevied contingency reserve of £5 million. This is an increase of 2.4% on last year’s budget, roughly in line with inflation. The increase in budget also reflects the increased volume of pension complaints, particularly SIPP complaints, but this is expected to be offset by greater cost efficiencies.

2019/20 sees the FSCS commence the first year of its strategy for the 2020s, centred around the four pillars of preparation, protection, promotion and prevention. The consultation paper outlines how the FSCS’s budget has been allocated to each area.

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