FCA seeks feedback on targeted support proposals for pensions

What does this mean?

The FCA’s broader work on the Advice Guidance Boundary Review (AGBR) shows that consumers want greater support but are often not willing, or it is uneconomic, to pay current adviser fees. Firms are sometimes reluctant to provide support to consumers they identify as making a poor decision, for fear of breaching the advice guidance boundary.  Initially, the FCA is considering the approach for pensions targeted support, but this is only the first step in its work.

The FCA envisages a firm’s targeted support taking three broad steps: 

1. establishing pre-defined scenarios in which to provide targeted support
2. pre-defining relevant consumer segments which represent groups of consumers with shared characteristics
3. providing the same suggestions to all consumers in the same consumer segment; this would consist of a ready made solution for each consumer segment within a relevant scenario. 

In all instances, firms should only offer targeted support where they have reasonable grounds to believe it would deliver better outcomes than if not provided. 

Following this consultation the FCA expects to publish an additional consultation in summer 2025, including proposed rules to deliver targeted support services. Any rules are expected to build on the Consumer Duty and ensure good outcomes for consumers, with the regulator proposing that firms which provide targeted support must take responsibility for the intended outcome of a particular product. Targeted support is expected to fall under the jurisdiction of the Financial Ombudsman Service and Financial Services Compensation Scheme.

In terms of better outcomes, the use of targeted support can not only reduce harm through suggestions such as highlighting unsustainable pension withdrawal rates, but also deliver better outcomes through guiding consumers to better decisions. The FCA acknowledges that under current rules, targeted support would likely be subject to the same regulatory framework as holistic advice. But it is considering other options including introducing a new regulated activity, creating a sub-permission within advice permissions, or allowing firms to offer targeted support if they hold certain other authorisations. 

Firms need to also consider factors such as the Consumer Duty and treatment of vulnerable customers when offering the service. For example, if a good consumer outcome was to reduce an unsustainable withdrawal rate, would a firm be able to meet its obligations under Consumer Duty without offering target support?

The FCA has indicated that it expects that targeted support would predominantly be a free service, and commission payments would not be allowed. By definition this may require firms to cross-subsidise through other services, noting that fair outcomes are needed for all customers. It also marks a change in policy, which saw vertically integrated firms (VIFs) substantially investing to avoid cross subsidisation during the Retail Distribution Review process. The FCA also states that the sale of new products would not be prohibited, so those firms with legacy clients on expensive products whom they have struggled to migrate to more modern cost effective options could see this as a wider opportunity to migrate customers to better solutions.

What do firms need to do?

While the FCA is not proposing concrete rules at this stage, this agenda will progress rapidly during early 2025. The regulator has already set out what targeted support may look like, including example scenarios, so firms should consider how they would integrated this into their businesses. The balance of whether this is a regulatory opportunity, or regulatory obligation, should also focus board attention.

More broadly, this is a key foundation of the FCA’s retail strategy for next year. Firms must rapidly consider not just the operational challenges, but also how this will impact on wider strategy, such as the pricing models and any existing transfer pricing/cost allocation for VIFs and non-VIF competitors, the impact on other retail products outside of pensions, and the human impact of training or staffing/skills models. Future simplified advice services could be an opportunity and catalyst for future, technology-based, services.  

The FCA has previously said that firms taking an unduly conservative approach to ‘guidance’ may not deliver good consumer outcomes, so the interaction with existing obligations under Consumer Duty rules is extremely important to assess.

There are potential benefits too, such as whether targeted support would allow firms to accelerate other projects, such as migration of legacy customers to clean share classes or more cost effective products.  But that could impact contractual obligations with distributors (for example if new products didn’t pay any trail fees).

Next steps

The consultation closes on 13 February 2025. A further consultation including rules is expected in summer 2025.