The chief executive of investment platform AJ Bell sent a letter to the newly appointed boss of the Financial Conduct Authority (FCA), Nikhil Rathi, to express concerns on the investment pathways models to be implemented for drawdown consumers.
The measure was announced in January 2019 and intends to give anyone entering drawdown, regardless of whether they are receiving financial advice or not, investment options so that retirees are not sitting on cash for too long.
Investment pathways were supposed to come into force in August 2020, but due to the covid-19 pandemic their roll out has been pushed back to February 2021.
Under the model, consumers will have four options, or ‘pathways’, to choose from after they enter drawdown, based on their investment objectives:
- Option 1: I have no plans to touch my money in the next five years;
- Option 2: I plan to use my money to set up a guaranteed income (annuity) within the next five years;
- Option 3: I plan to start taking my money as a long-term income within the next five years; or,
- Option 4: I plan to take out all my money within the next five years.
‘Real harm’
But Bell lamented that the current model is “fundamentally flawed” because he believes it will not deliver the intended outcomes.
“The FCA clearly has its hands full dealing with covid-19 and I derive no pleasure from taking pot shots at an already overburdened regulator.
“However, where I see an intervention that so obviously risks causing real and lasting consumer harm I cannot simply stand quietly by and watch it happen, even though investment pathways are commercially attractive to firms like AJ Bell.
“The FCA’s investment pathways reforms, while well-intentioned, are fundamentally flawed and will not deliver the customer outcomes the regulator has set out to achieve.
“Investment pathways risk funnelling people into investments that do not suit their needs or retirement priorities and are a mandate for pension providers to line their pockets by peddling their own in-house funds with little or no control on fund charges,” he added.
‘Wrecking ball’
Bell accused the UK watchdog of “conducting a huge experiment” and rolling out an investment model without even knowing whether it will work or not. Additionally, pathways could lack diversification which would hurt consumers’ returns in the long run.
He continued: “If investment pathways had been in place before the covid-19 markets dip hit in March and April, providers would have faced a barrage of complaints from understandably angry customers who had lost money after it was suggested they put all their money in a single investment that subsequently fell by 10%-15%.
“The already uncertain lines between advice and guidance will become even more blurred and these customers will feel and claim they have been advised, when they haven’t.
“As a provider, one of the real challenges is that the FCA has prescribed every step of the investment pathways process to the nth degree of detail, instead of adopting a principles-based approach.
“The pension industry has to make these rules work with existing drawdown processes that vary significantly across the industry. That increases the cost to the industry and ultimately to customers.
“The regulator now needs to re-engage with the industry to understand just how wide of the mark its initiative is from its target.
“Mr Rathi has the opportunity to refocus the FCA’s energies on solving the very real problems identified in the FCA’s Retirement Outcomes Review with targeted and proportionate measures in favour of the wrecking ball called Investment Pathways.”
