Response to FCA consultation on supporting consumer pensions and investment decisions

Consumer Scotland is the statutory body for consumers in Scotland. Established by the Consumer Scotland Act 2020, we are accountable to the Scottish Parliament. The Act defines consumers as individuals and small businesses that purchase, use or receive in Scotland goods or services supplied by a business, profession, not for profit enterprise, or public body.

Our purpose is to improve outcomes for current and future consumers, and our strategic objectives are:

• to enhance understanding and awareness of consumer issues by strengthening the evidence base
• to serve the needs and aspirations of current and future consumers by inspiring and influencing the public, private and third sectors
• to enable the active participation of consumers in a fairer economy by improving access to information and support

Consumer Scotland uses data, research and analysis to inform our work on the key issues facing consumers in Scotland. In conjunction with that evidence base we seek a consumer perspective through the application of the consumer principles of access, choice, safety, information, fairness, representation, sustainability and redress.

The Consumer Principles are a set of principles developed by consumer organisations in the UK and overseas.

Consumer Scotland uses the Consumer Principles as a framework through which to analyse the evidence on markets and related issues from a consumer perspective.

The Consumer Principles are:

• Access: Can people get the goods or services they need or want?
• Choice: Is there any?
• Safety: Are the goods or services dangerous to health or welfare?
• Information: Is it available, accurate and useful?
• Fairness: Are some or all consumers unfairly discriminated against?
• Representation: Do consumers have a say in how goods or services are provided?
• Redress: If things go wrong, is there a system for making things right?
• Sustainability: Are consumers enabled to make sustainable choices?

We have identified access, information and redress as being particularly relevant to the consultation proposal that we are responding to.

Overview

Consumer Scotland welcomes the opportunity to respond to the FCA consultation on supporting consumers’ pensions and investment decisions: proposals for targeted support. We agree that consumers must be able to invest for their future with confidence, with a full understanding of the relative risks and rewards of investment and the protections they benefit from when they make investments.

Our comments on the proposals focus on the potential benefits to closing the advice provision gap through targeted support. We also outline a number of issues that will need to be considered to ensure that consumers, particularly those in vulnerable circumstances, are protected and supported to engage in the market without undue exposure to risk of harm. It will be important to take the range of consumer needs into account and avoid a one-size-fits-all approach. Work will be required to ensure that consumers are aware of the limitations of advice provided through targeted support and to support financial literacy in the round as well as considering the entrenched barriers to investment and the causes and implications of low financial knowledge.

Benefits of the proposal

Consumers can face barriers to participating in the pensions and retail investment market due to the complex and technical nature of the landscape. There is often a substantial knowledge and understanding imbalance between consumers and providers. The FCA commissioned consumer research published alongside this consultation highlighted that 36% of consumers exhibit under-investing behaviours, such as holding excess cash, and as a result risk missing out on long-term financial gains that they could unlock by investing.[i] Ensuring that consumers have the information and support they need to make informed decisions about investments is key to enable participation in the market.

We note the FCA’s findings in relation to potential gaps in the current financial advice landscape. Only 9% of adults received regulated financial advice in the last year, with 59% not accessing information, guidance or regulated advice on saving, pensions or retirement planning in this time period.[ii] The FCA commissioned research found that just 27% of those who hold investible assets (meaning £500 or more of cash or investments or a pension) have accessed any regulated or statutory information, advice or support in the last 3 years. There is a risk that consumers may either fail to take actions that could improve their circumstances or make decisions without accessing appropriate advice and support.

We note that consumers generally welcome increased support for making investment decisions, with 54% of savers saying they would welcome ‘a lot’ or ‘a little support’ in deciding whether to invest excess savings and that 40% of consumers cite a lack of knowledge as the main barrier to investing.[iii]

A range of approaches may be needed to meet the needs of consumers

We support the aim of closing the gap in the information and support available for those who could invest and currently do not, through the creation of targeted support to better enable consumers to make complex decisions about investments. The FCA’s consumer research indicates that consumers with lower levels of financial knowledge are less likely to seek support than consumers with more knowledge. Without improved access to advice and support there is a risk that these consumers may make decisions that do not deliver the outcomes they seek.

We welcome the potential benefits to consumers, particularly those with lower levels of financial knowledge, of having a wider range of resources to support making informed decisions. At the other end of the spectrum, the same FCA research indicates that consumers who see themselves as knowledgeable, but who may often receive advice from unregulated sources such as friends or social media may be prone to taking high risk decisions. As consumer behaviour may range from disengaged to hyper-engaged, as set out in the consumer research, any approach must balance the range of needs that consumers have, according to their circumstances, rather than taking a one-size-fits-all approach. 

We note from the consumer research published alongside the consultation that the investment gap is set to continue if it is not addressed. Over half of non-investors in the research sample stated that they are unlikely to be investing in the future.[iv] As set out in this research, younger people were more likely than older groups to say that they expect to invest in future years and it is important to equip this group of potential investors with the knowledge they need. In line with the consumer principle of information, the creation of targeted support would benefit consumers who are in a position to invest by providing them with greater guidance and support than is currently available to them, but without accessing personalised support.

Consumer research published alongside the consultation, indicates that consumers felt targeted support was more personalised than current offerings and was easy to access.[v] In line with the consumer principle of access, we consider that targeted support will provide another option for consumers, alongside information or generic guidance and holistic support. We agree with the FCA view that there is a role for both targeted support and simplified advice which would allow firms to provide individualised advice simply and affordably in straightforward cases.  We welcome the inclusion in the guidance of examples of where targeted support could be used and the explanation of how this differs from current advice frameworks.

Consumer Scotland considers that introducing targeted support has the potential to improve consumer engagement with the market, particularly for consumers who cannot afford specific and individually tailored advice but would benefit from greater support and guidance than is currently available. We note from the consumer research published alongside the consultation that social media is an increasingly valued source of support amongst a broad range of consumers and agree that there is a need to explore and address the risks associated with unregulated information being shared and accessed via social media. This demonstrates the desirability of improved availability of and access to regulated advice for consumers, including solutions such as targeted support.[vi]

Consumers with lower savings and investment pots who are not going to earn firms as much in fees may be viewed by some firms as a commercially less attractive segment. In line with the consumer principle of fairness, Consumer Scotland recommends that governments and regulators should work with firms to ensure that all consumers, regardless of levels of saving and investment, should have the same level of choice in terms of advice.

Implementation challenges to consider

While we broadly support the proposal and agree that there are potential benefits for consumers, there are areas where specific, additional actions will be required to avoid detriment being caused, particularly to consumers in vulnerable circumstances.

As part of the implementation of the proposals, we recommend firms be required to address the wide range of potential drivers of and differing experiences of consumer vulnerability, particularly often undisclosed vulnerabilities such as poor mental health. Money and Mental Health research has found that some common symptoms of mental health problems can make it harder to keep on top of financial management or to get a good deal in complex markets, with their polling finding that while unwell, 63% people found it harder to make financial decisions.[vii]

The FCA’s recent review of consumer vulnerability found that consumers who were in vulnerable circumstances continue to experience poorer outcomes. They were more likely to report slow responses, failures to find the information they required or other negative experiences with financial services providers than other consumers.[viii] Consumer Scotland is of the view that more can be done, for example through user input into design of products and systems along with improved data collection, monitoring and usage, to ensure firms act to identify consumers who may be in vulnerable circumstances early, to encourage disclosure and to ensure that consumer experiences following any disclosure are positive and not negative. The review also found that very few firms are making effective use of data to monitor outcomes and to assess whether their products are meeting the needs of consumers in vulnerable circumstances.

The FCA highlights the importance of good data to enable firms to assess if they are delivering good outcomes, noting that wider sources of data may help firms understand the experience of consumers in vulnerable circumstances, including how they use products and the potential harms they face.[ix] We note the areas for improvement outlined by the FCA in ‘delivering good outcomes for customers in vulnerable circumstances – good practice and areas for improvement’ and we recommend that firms do more to incorporate data and insight about vulnerability into their customer base.[x] This should include making greater use of wider sources of data such as feedback from consumers in vulnerable circumstances, analysis of complaints data, behavioural insights data and referral and take up rates of additional support.

The review found that most firms could not show the FCA how they had embedded the needs of customers in vulnerable circumstances into their product and design process. This points to a need for firms to incorporate inclusive design principles in the provision of targeted support. Inclusive design is a way to ensure that markets are fair and inclusive, especially for consumers in vulnerable circumstances. By utilising inclusive design, firms can design products and services that work for everyone, recognising the diversity of consumer experiences and circumstances.[xi] In practice this may include things such as working with consumer bodies and specific interest groups to identify consumer needs, involving a range of users in product design and testing, providing multiple channels for communication  and actively asking for, and analysing feedback. We recommend that firms should follow the principles of inclusive design, supported by the provision of guidance from the FCA.  

If such targeted services are accessible and meet the needs of all consumers, the need for disclosure of vulnerability may be reduced. As the consultation notes, some disclosures may also be made during the process of receiving targeted support, and these circumstances may not previously have been known to providers with an ongoing relationship with the consumer. There needs to be clear system put in place by firms by which consumers can be exited from processes, with signposting to other sources of support, where it becomes apparent that products or services under consideration will not meet their needs. This should be supported by the FCA through the provision of guidance and monitoring to ensure that exiting and signposting processes are fit for purpose. This is especially important if services are designed to use AI or automatic prompts. Equally, where services are delivered in person, there is a need for staff training.

In line with the consumer principle of information, and in order to protect consumers from unintended consequences, it will be important for the FCA to ensure that firms make consumers aware of the limitations of advice provided through targeted support. We welcome the acknowledgement of the importance of ensuring that consumers understand that targeted support is not a fully personalised solution based on a complete understanding of the individual circumstances of each consumer. There may for example, be particular challenges with pensions advice where consumers may be entitled to a range of pension benefits across both public and private sectors with differing conditions and drawdown options attached to these. It may be challenging for providers to give advice which does not cross boundaries. In such circumstances, it may be necessary for firms to restrict the scope of targeted support or signpost to ways in which consumers could seek more holistic advice, including government and charitable sources of support.

Given these complexities we would suggest that the FCA also engage in monitoring of at least a sample of communications aimed directly at consumers to ensure that consumers are being provided with clear, accurate information about the limitations of advice given. In addition to this, we note the potential risk of firms promoting their own products to consumers when these may not be the most suitable solutions or where it has not been made clear to consumers that recommendations are not individualised. We note the findings of the consumer research published alongside the consultation where consumers identified challenges with example propositions of targeted support. This suggests that there is consumer scepticism about sales tactics and being ‘sold to’ by providers when a product may not be the best offering on the market for them, along with concerns about privacy and control and security and fraud risks.[xii] It will be important that this scepticism does not translate into a lack of trust which may risk consumers instead seeking advice from unregulated sources, including via social media. Further, and wider, work by the FCA will be necessary to combat the risks associated with unregulated advice providers.

In relation to consumer trust, we consider it is fundamental that, where products are mis-sold, consumers should have redress. We support the proposal that redress mechanisms should follow the same complaints handling rules that already apply for the provision of other regulated forms of investment advice. Having access to the Financial Ombudsman will mean that consumers receiving targeted support will have access to a free, informal and independent alternative to the courts for the resolution of their complaints. However, we recognise that as the nature of the advice provided is different from other regulated advice, targeted support complaints will need to be handled differently to complaints about existing forms of advice. It will be important that providers clearly understand the nature of the advice provided and can identify where advice may cross boundaries between different types of advice or support. Providing complaints information that crosses advice boundaries may also involve negotiating some complexities and we recommend that this advice be user tested before it is finalised.

We welcome the detail provided in the consultation paper on defining common characteristics and the requirement that firms must consider not only common characteristics which would align a consumer with a segment, but also common characteristics which would prevent a consumer from being aligned with a segment. We note that the consumer research published alongside the consultation points to high expectations from respondents about the personalisation of information.[xiii] We acknowledge the difficulty in trading off the level of granularity and the cost implications for firms which may then have an impact on consumers. We acknowledge that the common characteristics will be high level in nature. We welcome the guidance around ensuring sufficient granularity in consumer segments and would welcome further information or examples from the FCA to illustrate how this segmentation may look in practice, particularly for consumers in vulnerable circumstances.

Finally, we note that consumer research found that there were multiple entrenched barriers to investing, including low knowledge, low confidence, attitudes towards risk and stereotypes about who invests. Overall, we view the proposal as providing a clear potential benefit to consumers in reducing the knowledge gap identified. Further work will be needed to tackle the other barriers identified, and Consumer Scotland would support further work aimed at identifying how levels of consumer confidence and understanding of risk could be improved, in order to ensure more positive outcomes for consumers. Such an approach would be consistent with the outcomes based approach provided by under the Consumer Duty.

In order to ensure that the proposals provide maximum benefit for consumers while mitigating against unintended consequences, consumer information must clearly communicate the role and limitations of targeted support. This is needed to enable consumers to make an informed decision about the solution that is best for their circumstances. The provision of targeted support must take full account of the potential drivers of consumer vulnerability, and include provision for exiting consumers where disclosures show that products would not meet their needs or where it is apparent that holistic advice will be required to reach an informed decision.

While targeted support has an important role to play, it needs to be considered as part of a broader strategy which considers financial literacy in the round, including a focus on the entrenched barriers to investment and low financial knowledge.[xiv] We would welcome further opportunities to engage with the FCA on the advice gap and implications for consumers in Scotland.