Okay, I get that the FCA’s Conduct of Business Sourcebook (COBS) isn’t the most thrilling of reads, but sometimes it can be really quite revealing. The extension of the remit of the Independent Governance Committee (IGCs) to include investment pathways is a case in point.
The narrative in the Policy Statement published by the FCA back in December 2019 is interesting, and important, in terms of setting out what the FCA’s expectations are. But, when push comes to shove, what is enshrined in the rules in COBS is what really matters. These are the rules to which IGCs will be held accountable.
The new rules are really quite definitive – and demanding of IGCs – in terms of the need to assess the appropriateness of investment pathways and to review all customer communications.
Let's take a closer look at COBS's reference to IGCs
COBS 19.5.5 R covers the Terms of Reference for IGCs. The rules require that IGCs assess: whether the pathway solution is designed and managed in the interests of customers, and has a clear statement of aims and objectives; and whether customer communications are fit for purpose and properly take into account their characteristics, needs and objectives.
And this latter rule on customer communications needs to be considered in the light of the new COBS rules which apply to product providers which require them to: “Describe to the retail client, using plain language, the level of riskiness of each pathway investment”.
With IGCs having to assess each pathway investment as to whether it is appropriate or not and having to assess all customer communications as to whether or not it is fit for purpose, it does sound awfully like a sign-off process.
IGCs came into existence 5 years ago to consider the value for money of workplace pension schemes. Members of such schemes don’t choose the product provider – it’s selected by the employer – so independent oversight by IGCs provides a useful level of consumer protection.
But how does this impact the non-advised consumer?
Non-advised drawdown is a whole different ball game. Decisions on complex financial matters are being taken by consumers who are not, in the main, well-equipped to make them. The risk of consumer detriment is plain for all to see. The regulator must focus its actions on how best to protect consumers. So, in such circumstances, it does rather appear that the creation of a quasi-executive role for IGCs is by design.
And, on the back of all this, it is little wonder that members of IGCs are now scrutinising their contracts to ensure that they are appropriately protected in terms of potential legal liability.
So what next?
EV has developed a process that analyses each of the pathway solutions developed by a product provider in detail. This process culminates in the production and publishing of an Appropriateness Report. This report uniquely summarises the results of the analysis and forms a judgement as to the appropriateness of the pathway solutions which the product provider proposes to offer.
The output from Appropriateness Reports should also be invaluable to providers as part of their product design processes, and provide their IGC or GAA with evidence that they have undertaken the required due diligence and compliance efforts.