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The Perils of Giving Consumers Incomplete Information

Author: Tim Jablonski
24 April, 2020

Option 3 blog 2

Decisions about drawdown are not easy to make. Wouldn’t it be great if we lived in a world where consumers had easy access to regulated financial advice at a cost that was an affordable percentage of their wealth? But that’s something for another day. 

Meanwhile, customers are entering drawdown on a non-advised basis in their droves. Unsurprisingly, they are not well-equipped to make the complicated decisions they are faced with. In such a situation, it is tempting to think “better not tell them too much then”.

But, product providers have a multitude of risks to manage – regulatory, business, reputational – and the reality is that, in communicating with non-advised customers, less is most certainly not more. The upcoming introduction of investment pathways – and the four FCA-prescribed objectives – is a case in point.

Unsurprisingly, the regulator wants each investment solution selected by the product provider to be appropriate for the pathway objective and the characteristics of the consumers likely to be using it.

But, much more interestingly, the FCA has been really rather definitive when it comes to consumer communications. It is worth quoting directly from their PS19/21: Retirement Outcomes Policy Statement

We do not want consumers to select a pathway solution if the risk profile of the solution does not match their attitude to, or capacity for, risk. Providers must describe the riskiness of each investment solution that they offer, to enable consumers to make this assessment”. And therein lies the rub.

Let’s take a look at what this might mean in practice for the introduction of investment pathways.

The FCA’s prescribed Option 1 – I have no plans to touch my money in the next 5 years – is familiar territory to us and pretty straightforward. The product provider might select an investment solution which seeks to deliver a high return over 5 years (say), for a consumer with a moderate or balanced risk target (if this, say, is the assumption the provider has made as to the characteristics of the consumers likely to be using Option 1). The risk to the consumer is the volatility or range of outcomes at the end of 5 years. And we’ve been communicating this sort of stuff to consumers for ages.    

But Option 3 – I plan to start taking my money as a long-term income within the next 5 years – is a whole different kettle of fish. The customer has declared that they want to take an income. So the product provider must select an investment solution based on delivering the highest sustainable income over the long-term. Fundamentally, though, the risk, as perceived by the consumer, is downside risk in his or her income which is something altogether different. It is all about the likelihood that the income can continue unchanged over the long-term. 

To help the consumer assess capacity for loss, consumers must understand what the potential downside might realistically look like. How else are they to determine their capacity for loss? They are non-advised, so drawdown providers have no other practical way of meeting the FCA’s wish that consumers should not “select a pathway solution if the risk profile of the solution does not match their attitude to, or capacity for, risk” unless the potential downside risk is clearly shown. 

Reminding ourselves of the regulatory requirement to describe to customers the riskiness of the investment solution tells us that communication of the likely income level, and its sustainability, is a necessity and not a nice-to-have. How else can customers’ expectations be managed?

Non-advised drawdown business requires astute risk management by product providers. As part of this, the perils of not communicating a sustainable income to customers, who have declared they want to take a long-term income, are self-evident.

Our Appropriateness Report

In careful response to this, EValue has developed a process which analyses in detail each of the pathway solutions developed by a product provider. 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. 

To learn more about the EValue Appropriateness Report or to download a preview of this, please click here.

appropriateness report