Product disclosure: Retail investment changes to reflect RDR Adviser Charging and to improve pension scheme disclosure The ABI s response to CP11/3 1. The Association of British Insurers (ABI) is the voice of the insurance and investment industry. Its members constitute over 90 per cent of the insurance market in the UK and 20 per cent across the EU. Employing more than 300,000 people in the UK alone, it is an important contributor to the UK economy and manages investments of 1.5 trillion, over 20% of the UK s total net worth. 2. The ABI welcomes the opportunity to respond to the FSA s product disclosure consultation. Executive summary 3. The purpose of the KFI has evolved over time so that a large amount of information is included which is often unclear and unhelpful for consumers. With the introduction of the RDR and FSA s proposal to incorporate real projections, the purpose of the KFI has continued to expand. 4. The ABI believes there is a need to fundamentally review the purpose, role and content of the Key Features Illustration (KFI) as we do not believe these are delivering good consumer outcomes. We are keen to work closely with the FSA to undertake this review and believe this should start with the consumer to determine what information they require and how this can best be presented to help them make well informed decisions. We do not support the FSA s approach to simply test amendments to the existing structure and content of these illustrations as this assumes the current approach is delivering good consumer outcomes and only needs tweaking. 5. As part of this review, we believe it would be appropriate to look at achieving greater consistency between KFI and Statutory Money Purchase Illustrations (SMPIs). It would be wrong to assume that either approach is correct, but the inconsistency between the two documents is leading to consumer confusion which does need to be addressed. 6. Such a review is unlikely to be completed in time to enable firms to implement any recommendations ahead of the RDR. We therefore believe it would be appropriate for the FSA to require firms to implement only the minimum necessary changes to be RDR ready. 7. The ABI recognises the need to adapt the KFI so consumers are clear that any adviser charging deductions will reduce the overall value of their investment. In our response to question 2 we have outlined the minimum changes we believe firms should be required to introduce ahead of the RDR. Any requirements which go beyond this minimum would be costly to implement, would create little or no consumer benefit, and are likely to be superseded by the EU PRIPs initiative and the wider need to review the KFI.
8. The ABI agrees that it is sensible to require personalised GPP illustrations to meet the same standards as required for individual personal pensions. Again, we believe firms should only be required to implement the minimum necessary changes ahead of the RDR while the fundamental review is ongoing. Indeed, it is unclear what effect autoenrolment rules will have on the purpose of a KFI or how this will compare to disclosure documents produced by NEST. This should be considered as part of the fundamental review. 9. We do agree that all pension providers should be required to provide their customers with a KFI. To enable consumers to compare the costs of investing in different SIPPs and pension products, all providers should produce personal and fund specific illustrations. Chapter 2 Changes to product disclosure arising from RDR adviser and consultancy charging Q1: Do you have any comments on the proposed new effect of charges format for personal pensions, where providers choose not to facilitate payment of adviser or consultancy charges? 10. The ABI does not support the FSA s proposal to require providers choosing not to facilitate adviser or consultancy charges to amend their KFI to incorporate the proposed effect of charges table. As we have outlined in our response to question 2, we believe there is a wider need to fundamentally review KFIs, focusing on what information consumers need when purchasing a product and how this can best be presented. 11. While such a review of the KFI is ongoing, we believe the FSA should ensure that any changes to the KFI be kept to a minimum. For firms not facilitating adviser or consultancy charges, we believe there should be no requirement to make any changes to their KFI to be RDR ready. Any changes these firms are required to make will be costly to implement and are likely to be superseded by the EU PRIPs initiative and wider need to review the KFI. Q2: Do you have any comments on the proposed new effect of charges format in COBS 13 Annexes 3 and 4 for investments and personal pensions where providers choose to facilitate payment of adviser or consultancy charges and will need to show the effect of these charges as well as product charges? 12. This question covers a number of important areas. We have therefore divided our response under three sub-headings: Personal pension disclosure where adviser charges are facilitated through the product Non-pension disclosure where adviser charges are facilitated through the product Proposal to require a new KFI where a new adviser charging facilitation arrangement is set up or there is a non-contractual increase 2
Personal pension disclosure where adviser charges are facilitated through the product 13. The ABI recognises there is a need to change KFIs where a provider facilitates an adviser charge through a pension. It is important that consumers are clear that any adviser charging deductions will reduce the overall value of their investment and income they will receive in retirement. 14. However, we believe the FSA should ensure changes to the KFI, where adviser charges are facilitated through the product, are kept to a minimum, as set out below in paragraph 16. Any requirements which go beyond this minimum will be costly to implement and are likely to be superseded by the EU PRIPs initiative (pensions are only temporarily out-of-scope) and the wider need to review the content of the KFI going forward. We believe the FSA s proposals, as outlined in this consultation, go beyond the minimum requirements necessary at this stage. 15. Instead of implementing the changes outlined in the consultation document, we suggest there should be a twin-track approach to develop KFIs to account for wider regulatory changes. This should include: specifying the minimum necessary changes to allow adviser charges to be incorporated in the KFI for the purposes of the RDR; and undertaking a fundamental review of the purpose, role and content of the KFI. We have outlined this approach in more detail below: Minimum necessary changes to the KFI document to allow adviser charges to be incorporated 16. We believe the FSA should only require providers to implement the minimum necessary changes to their KFI where they are facilitating an adviser charge through a pension. This would ensure the costs associated with the change are kept to a minimum and can be introduced in time for the 31 December 2012 deadline. We believe the changes should be limited to: Require firms to add a withdrawals\adviser charges column to the effect of charges table. The adviser charges facilitated through the product would therefore be included in the what you might get back column and the RIY calculation. We have illustrated this in the below table: At end of year 1 2 3 4 5 At age 65 Total paid in to date Withdrawals / adviser charges This column is not mandatory and could be excluded to keep the output to A4. Total actual deductions to date Effect of deductions to date This number will be consistent with the mid-rate projection in the what I might get when I m 65 table What the transfer value might be Include a description of the adviser charges facilitated through the product in the how much will the advice cost section? 3
17. We believe our proposed minimum changes meet the FSA s policy objective by providing the transparency required to ensure consumers understand the impact of facilitating an adviser charge through their pension, without creating unnecessary costs for providers. 18. These changes should be the minimum requirements for firms to be considered RDR ready. However, we believe there should be freedom for individual firms to go beyond these minimum requirements where they can demonstrate this meets the needs of their customers. For example, some providers believe for some pension products it could be appropriate to go beyond the minimum standards to: separate out the withdrawals and adviser charges column for policies where there are likely to be deductions from the policy other than adviser charges facilitated; show two separate RIY figures, one including only product charges and a second showing all charges; and reduce the number of rows included in the effect of charges table so that this only shows at end of year 1, 2, 3, 4, 5 and at age 65. Any changes introduced by firms, whether it be the minimum requirements or additional modifications they feel are appropriate, would be a short-term fix to accommodate RDR changes. In the longer-term, we believe there is a need to fundamentally review the KFI. Fundamental review of the purpose, role and content of the KFI 19. We believe that the current KFI is not delivering good consumer outcomes. The purpose of the KFI has evolved over time so that a large amount of information is included which is often unclear and unhelpful for consumers. With the introduction of the RDR, the role of the KFI has again grown to incorporate adviser charging information. 20. The ABI believes a fundamental review of the purpose, role and content of the KFI is needed. We agree with the FSA s conclusions that the column headings of the effect of charges table are misleading. However, we believe these changes should be considered as part of a wider review. 21. We believe a fundamental review of the KFI should start with the consumer to determine what information they require from a KFI and how this can best be presented. This should consider how the KFI interacts with other point-of-sales documentation given to the consumer such as the Key Features Document (KFD) and Initial Disclosure Document (IDD). We suggest the review should also consider how greater consistency with SMPIs could be achieved. We are consulting our members on options for undertaking research to inform such a review. We are keen to engage with the FSA throughout the whole process, including the consumer research projects which we believe will be necessary. 22. It is unlikely that a fundamental review will be concluded in sufficient time for firms to implement changes ahead of the 31 December 2012 RDR implementation deadline. For this reason, we have proposed the minimum necessary changes outlined above. Depending on the conclusion of the review of the KFI, if significant changes are found to 4
be the best way forward, we recommend a longer transition period for firms to meet any new requirements. Non-pension disclosure where adviser charges are facilitated through the product 23. There has been some confusion surrounding the FSA s proposals for changing nonpension disclosure where adviser charges have been deducted from the investment. We understand from further conversations with FSA officials leading on disclosure that firms will only be required to: provide a short explanation of any adviser charges which are expected to be facilitated through a product in the summary of charges section; and where an effect of charges table is included reflect the impact of any adviser charging withdrawals on the policy value. 24. Assuming our understanding is correct, we support the FSA s proposed changes for investment disclosure in light of the RDR. We believe these changes will ensure the consumer is clear about all deductions from their investment without requiring firms to implement costly additional changes to their disclosure documentation. 25. Importantly, if the FSA adopted the minimum changes approach for pensions (as outlined above) this will ensure there is consistency between investment and pension KFI documents. We believe this is important if consumers are to fully appreciate the total adviser charge they will be paying. As the FSA will be aware, adviser charges can only be facilitated through a pension without incurring a tax liability if it is to cover the cost of pension advice only and is commensurate with the advice given. It is therefore highly likely that consumers receiving advice on a portfolio of investments could facilitate their adviser charge through a number of products which may include both a pension and investment. Ensuring there is consistency between pension and investment KFIs is essential if the consumer is able to understand how the total adviser charge they are required to pay will affect their investment portfolio. Proposal to require a new KFI where a new adviser charging facilitation arrangement is set up or there is a non-contractual increase 26. The ABI strongly opposes the FSA s proposal to require a new KFI to be issued where there is a new adviser charging facilitation arrangement set up or a non-contractual increase in the amount of charge facilitated. We do agree that providers should confirm when an arrangement is set up or increased, but believe there are better ways to inform consumers of this change. 27. A KFI document includes a large amount of information primarily designed to help a consumer determine whether they wish to purchase a product. The document incorporates information on contributions, how these are invested, charges and often provides a projected maturity value. The advice cost forms just a small part of this. 28. We are concerned that if the FSA required firms to provide a KFI document when a new adviser charging facilitation arrangement is set up or there is a non-contractual increase, this risks confusing consumers by overloading them with information not relevant to the change. We believe it would be appropriate to only provide information to the consumer 5
which focuses on the change in adviser charge. Indeed, when a consumer switches funds within an investment, this can impact on much of the information provided in the original KFI, but there is no obligation for firms to provide a revised KFI. In many cases, to confirm that a change in investment funds has been made, the provider simply writes to the consumer. 29. We believe the FSA s proposal would also be impractical and expensive to administer where external factors require a large number of adviser charging facilitation arrangements to change. A good example of this would be an increase in the rate of VAT which would require providers to issue a new KFI to most, if not, consumers with an ongoing adviser charging facilitation arrangement. This would be disproportionately expensive given the likely cost increase to the consumer will only be very small. 30. Although we oppose the FSA s proposal, we do believe it would be sensible to require providers to confirm when a change has been made. We believe this could be summarised on one-side of A4 and include a description of the charge facilitated and an explanation of the effect this would have on the consumer s investment. We encourage the FSA to include a high level rule which outlines this expectation, but allow individual firms to decide how they should disclose this information to the consumer. Q3: Do you agree that a generic KFI will not be appropriate for individual pensions where the product provider facilitates payment of the adviser charge, and our proposal to add a rule to this effect? 31. We agree that, in the majority of cases, a generic KFI would not be appropriate for individual pensions where the provider facilitates adviser charging payments. However, for a minority of cases this could be appropriate, such as larger advisory firms that use a consistent charging model for all clients. 32. Rather than banning generic KFIs for policies where an adviser charge is facilitated through the pension, we would encourage the FSA to include a rule which outlines an expectation that a generic illustration would only be appropriate where there are reasonable grounds for believing that the projection will be sufficient to enable an informed decision. Where a generic illustration is provided, we believe it would be sensible to require advisers to include their charging structure alongside this illustration. Q4: Do you have any comments on our proposal that, where personalised illustrations are provided for prospective members of GPPs, they should be set out in the same way as for individual personal pensions? 33. The ABI agrees that it is sensible to require personalised GPP illustrations to meet the same standards as required for individual personal pensions. We believe it is equally important for consumers to be aware of the deductions made from their pension in the group market, as this could include a deduction for advice the employer received. In addition to any consultancy charging deductions, a further adviser charge could also be facilitated through the pension. 6
34. However, as we have outlined in our response to question 2, we believe there is a wider need to review the KFI. We would therefore encourage the FSA to only require providers to make the minimum necessary changes while the industry undertakes a wider review of the purpose, role and content of the KFI. 35. We also believe that full consideration should be given to the effect of auto-enrolment on KFIs. The introduction of auto-enrolment, where employees automatically become members of their employer s group pension scheme, changes the purpose of the KFI. DWP regulations require employers to take into account charges when selecting an auto-enrolment scheme for their employees. It might therefore be more appropriate to inform group pension scheme members about the charges and deductions from their pension in post-sales communications rather than the KFI. Q5: Do you agree with our proposal to add a rule to say that generic projections for GPPs will only be appropriate where any consultancy charge is structured such that its effect is consistent across the group of individuals being given the generic projection? and Q6: Is there a need to allow generic projections for GPPs in these circumstances and are there any other circumstances in which you consider that generic illustrations should be permitted for prospective GPP members? 36. As the FSA has rightly identified, some firms do not provide generic illustrations for GPPs, instead preferring to provide personalised projections. However, a number of firms prefer to offer generic illustrations. We believe the FSA should give firms the option to continue this, especially as the use of generic illustrations could become increasingly important with the introduction of auto-enrolment rules. 37. The National Employment Savings Trust (NEST) will be a trust-based occupational pension scheme and is therefore entitled to prepare generic illustrations. A direct alternative to NEST will be a group contract-based pension scheme. To ensure a level playing field is maintained between the two alternative types of employer pension schemes, it is important that GPPs maintain the ability to provide generic illustrations providing these are appropriate. 38. Following the introduction of the RDR, product providers are expecting to facilitate the payment of consultancy charges through a GPP. We agree that generic illustrations would not be appropriate where there are a large number of variables which would need to be projected. Any firm providing a generic illustration would need to ensure the illustration enables the consumer to make an informed decision about the product. 39. In the consultation paper, the FSA has outlined an expectation that generic projections would not be appropriate for GPPs where the consultancy charge could be taken in different ways for different members or if the impact of the charges could vary in relation to the characteristics of individual members. Given members, or sub-group members, of a GPP are always likely to have different characteristics, it would be helpful if the FSA clarified the circumstances where they believed a generic illustration would be appropriate. For example, if a consultancy charge is facilitated in a consistent way for 7
all GPP members, but the age profile of scheme members differs, does the FSA believe a generic illustration is appropriate? We suggest this would be appropriate as a generic illustration typically provide an indication of potential return for different age groups by showing separate illustrations for people aged 20, 30 and 40. 40. We are also concerned that the FSA s proposed COBS rule 13.4.2 R is currently too wide. For example, under 13.4.2 R (4) we would expect the rule to refer to the group scheme rather than product. Q7: Do you agree that we should remove the requirement for a KFI for structured life products? If so, does our proposed rule in COBS 13.1.3R(3) (b) satisfactorily exclude such products? 41. The ABI supports the FSA s proposal to remove the current requirement for structured life products to provide a KFI. As the FSA has rightly identified, this information does not aid consumer understanding of the product and instead requires providers to overload consumers with unnecessary information. We believe the proposed COBS wording satisfactorily excludes such products. Q8: Do you have any other comments on the draft rules in Appendix 1? 42. The rules and guidance in COBS 13 - Annex 4, presume that adviser and consultancy charges will be mutually exclusive. In reality, it is possible that both charges could apply to a single contract. For example, a scheme adviser could agree to provide additional advice to scheme members. We believe the rules should be amended to make clear that both charges could apply concurrently. 43. We believe the guidance for the treatment of existing business is unclear. In paragraph 2.15 of the consultation document, the FSA proposes to remove the concession which allows providers to omit the intermediate rate of return for in-force projections. While this might be appropriate for policies where an adviser or consultancy charge is facilitated through the product, we believe providers should retain this concession for legacy business. SMPIs only show projections on a single inflation-adjusted rate, while the FSA s proposal requires providers to use three non-inflation-adjusted rates. This creates inconsistency between KFIs and SMPIs and confusion for consumers. Q9: Do you have any comments on the proposal that Moneymadeclear comparative tables should contain only product charges after the RDR rules come into force? 44. The ABI agrees that the information included on the MoneyMadeClear comparative tables should only contain product charges after RDR rules come into force. However, it is important that the information included in these tables does not mislead consumers. 45. Following the introduction of the RDR, providers have the option of offering different factory gate prices on the same product. There is a danger that consumers will be unable to access a product included on the comparison table at the quoted price unless they use the appropriate distributor. This is especially true for consumers purchasing a product through a non-advised channel where commission can continue to be paid and will potentially increase the cost of the product. 8
46. We believe it would be appropriate for providers supplying information for the comparative tables to provide details of product costs on their standard terms. Appropriate warnings should be included on the comparative site to ensure consumers appreciate that the price is not fixed and could vary depending on where and how they purchase the product. 47. The ABI has been working closely with the Money Advice Service (formerly the Consumer Financial Education Body) specifically in relation to information included on annuities in the comparison tables. Q10: Do you have any comments on the analysis of the costs and benefits as they affect your firm? 48. The ABI is not best placed to provide comments on the Cost Benefit Analysis. We are aware of a number of ABI members who will provide cost estimates in their individual responses. Chapter 3 Disclosure requirements applying to personal pension schemes (including SIPPs) Q11: Do you agree that it is proportionate and appropriate to revise our rules so that KFIs and projections are required for all investments held within a personal pension scheme, other than investments in commercial property, commodity investments, synthetic ETFs or shares (that are not shares in an investment trust)? Do you think that other investment categories, including investments that are not also specified in the Regulated Activities Order, should also be able to benefit from this exemption? If so, which ones and why? 49. The ABI shares the FSA s desire for a transparent personal pension scheme market where consumers are helped to make good purchasing decisions. We agree that there is a wide spectrum of different types of SIPP products, and there should be clear and consistent disclosure rules to ensure that the increasing numbers of consumers interested in these products are properly informed about the characteristics of the pension they are purchasing. 50. If the industry is going to achieve the objective of making it easier for customers to compare the costs of investing in different SIPPs and personal pensions, all providers of personal pension schemes need to provide personal and fund specific illustrations. Different operating models should not be used as an excuse to achieving this outcome for customers. 51. If a provider s pension scheme gives customers the option to invest in off platform investments, such as commercial property, we recognise that this creates challenges when providing a personalised illustration. However, we believe providers should take a best endeavours approach to provide customer with personalised illustrations that reflect their investment decisions. 9
52. We also suggest there is an opportunity to provide customers with a more succinct generic illustration at the point of initial enquiry. Any generic illustration should clearly highlight the availability of personalised illustrations on request. All providers should be required to offer a personalised illustration irrespective of whether the policy is issued direct to the consumer or through an advised sale. Q12: Do you think that, rather than identifying investment categories that are exempted, the rules should identify the investment categories for which KFIs and projections are required? 53. The ABI is happy with the FSA s proposal to identify the investment categories that remain exempt as long as the list gives absolute clarity. We would be equally supportive if the FSA decided to provide a list of investments which are in scope. Whatever method the FSA decides to adopt, we would encourage the FSA to ensure rules are clear and not ambiguous. 54. We would also consider it good practice for all charges, even those associated with investment categories still exempt from KFI requirements, to be properly laid out in the SIPP fee schedule. Q13: Current pension projection requirements, where they apply, are mandatory. Do you agree with this? As an alternative approach, do you think there is merit in considering making pension projections optional, in line with MiFID standards, and only applying certain disclosure requirements when projections are provided? If so, please explain why you think this approach would achieve better results for consumers. 55. As outlined in our response to question 2, the ABI would like to see a fundamental review of the KFI to provide a clear and consistent approach across all types of pension product in order to ensure that the requirements help customers. Q14: Do you agree that firms should disclose whether or not they receive commissions or retain bank interest earned on cash held in SIPP wrappers? If so, do you agree that firms should be required to disclose this information alongside information about interest rates payable to, and costs and charges payable by, scheme members? 56. We agree that providers should inform consumers about the interest on cash accounts the provider might retain or any payment the provider might receive from the bank under a commercial agreement. However, we do not believe it is appropriate to require firms to disclose the actual amount of commission or bank interest retained. We suggest the most important thing for customers is clarity and visibility of the interest rate that they are credited with on cash held in the SIPP bank account. 57. The joint ABI-AMPS good practice guide for the explanation of SIPP fees states that this information should be clearly disclosed in the fee schedule. This requires firms to: 10
disclose the interest payable or the mechanism for calculating it (if there is one) in the fee schedule and whether the SIPP provider may receive a payment from the bank or banks under a commercial agreement. The statement below indicates one way in which providers could disclose the interest on the bank account. The rate of interest you will earn on money held within the SIPP bank account is normally (e.g. Y% under base). The current rate of interest payable is X% (or available at www.xyzxyz.com). We may receive and keep payments from banks based on the aggregate cash balances held across all SIPP cash accounts with them. 58. There are significant practical and commercial issues if operators have to disclose the amount of any commission or interest earned or retained on cash. Commercial agreements with banks mean that firms benefit from a total pay rate based on the total amount of cash deposited across a number of different products and accounts. Disclosing bank interest earned or retained based on individual customers balances would be extremely difficult and costly to implement and maintain. Operators would need to have systems and processes in place to look through to balances for each customer in order to work out what interest had been earned and what margin had been retained. Balances are not static and will fluctuate on a regular basis due to debits and credits on the customer s SIPP bank account. Nor are interest rates static. Depending upon the bank agreement, some SIPP operators may be receiving money market rates which change daily. Hence the costs of requiring disclosure of interest eared or retained on cash would greatly exceed the benefits to consumers. 59. We would also emphasise the need to adopt coherent disclosure regulations across the industry and would note that the FSA did not suggest similar proposals in their recent consultation paper CP10/29 on platforms. Q15: Do you have any comments on the analysis of costs and benefits as they affect your firm? 60. The ABI is not best placed to provide comments on the Cost Benefit Analysis. We are aware of a number of ABI members who will provide cost estimates in their individual responses. Chapter 4 Possible future changes to pension illustrations to make an allowance for inflation Q16: Do you agree that we should be seeking to consult on moving our projection basis for pensions to be more consistent with the SMPI requirements? 61. While we agree in principle that there should be consistency between point-of-sale and post-sale projections, we believe it should not be assumed that either of the current approaches is the correct one to use. Rather, as outlined in Q2, we believe the better approach would be to undertake a fundamental review of the KFI. 11
Q17: If the answer to question 16 is Yes : a. should the 2.5% SMPI inflation assumption be used with all three projections; and 62. Simply incorporating the 2.5% SMPI inflation assumption at point-of-sale will not bring absolute consistency with post-sale projections as three growth rates are used in the KFI and only one in the SMPI. Further, KFI projections are based on the underlying assets whereas SMPIs use a standard rate of projection. Therefore, as outlined in our response to question 2, rather than assuming the SMPI projection assumptions are the best solution, we believe the better approach would be to undertake consumer research and fundamentally review consumer information needs at point-of-sale. 63. That said, in the interests of the consumer, we believe it is best to adopt the simplest approach. Therefore if the FSA decide to move to an SMPI projection basis, we believe that using one inflation rate would deliver the best outcome for consumers. b. do you wish to retain the flexibility to illustrate various spouses pensions and annuity formats rather than following standard SMPI assumptions? 64. While we believe there is a need to make the assumptions behind point-of-sale and post-sale projections consistent, we would like to retain flexibility to make changes dependent on individual circumstances. For example, it does not make sense to mandate providers to show likely retirement income based on buying a joint life annuity with a spouse s pension if we know the policyholder is unmarried and has no dependents. Q18: Do you have any comments on the costs and benefits of moving to inflationadjusted projections for personal pensions? If possible, please provide information on the likely costs and benefits for your firm. 65. The ABI is not best placed to provide comments on the Cost Benefit Analysis. We are aware of a number of ABI members who will provide cost estimates in their individual responses. Q19: Do you have any comments on the design and content of the examples in Annexes 3.2 and 3.3 we have prepared for future consumer testing? 66. We believe that Annexes 3.2 and 3.3 jump to solutions without any evidence to support them, rather than being based on a thorough understanding of consumers information needs when purchasing a pension. As outlined in our response to question 2, a fundamental review of the KFI should start with the consumer, to determine what information they require from a KFI and how this can best be presented. 12