The ROR is a follow-up to the Retirement Income Market Study (RIMS), published in March 2015, in which the FCA identified a number of issues relating to consumer decision-making following the introduction of the new pension reforms. Now these reforms have come into effect, the FCA wants to assess their impact on competition by looking at how firms and consumers have responded to the new freedoms.
Alongside the Terms of Reference, the FCA has published a market update that provides further information on the activities being undertaken on pensions and retirement income.
This update includes the results of the FCA’s recently completed review into how firms are signposting the availability of Pension Wise. The review found that the majority of firms in the sample were meeting the FCA’s requirements, however there were a number of areas where improvements could be made. The FCA were also encouraged to see some firms taking active steps to raise awareness of pension scams among their customers which other firms could consider adopting.
Christopher Woolard, director of strategy and competition at the FCA said: “In our 2016/17 Business Plan, we committed to looking across the pensions sector to ensure our policies support the fair treatment of customers and encourage competition. Deciding how to use pension savings is one of the most important decisions people will make.
“For a competitive and innovative market, it’s crucial that the market develops in a way that allows consumers to engage with their options, shop around, and switch providers where appropriate. We also want firms to compete hard for business, offering good outcomes for consumers through lower prices, products and services that meet customer needs, better customer service and wider choice.
“Since the introduction of the pension reforms there have been a number of key market developments. We want to assess how competition is developing in the retirement income market by investigating how firms and consumers have responded to the new freedoms.”
The Terms of Reference set out the scope of the ROR which will explore the following topics in more detail:
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Shopping around and switching.Given what the FCA already knows about the difficulties in shopping around for annuities, and the problems identified in the RIMS that consumers had in getting a good deal when shopping around for an annuity, we want to understand to what extent consumers can compare and choose between the larger range of products/options now available to them. We want to understand whether they can easily compare products, shop around, switch providers where they are not receiving what they want, and make good, informed, decisions.
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Non-advised consumer journeys.Now that consumers are accessing more complex products without advice, we want to understand these consumer journeys. We will explore whether complexity causes consumers not to engage, and whether so-called ‘choice architecture’ in non-advised sales leads consumers towards certain products, choices and decisions.
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Business models and barriers to entry.As firms adapt to the changes we are seeing in this market, we want to explore what business models and products are emerging and the impact on competition in this market. For example, how might firms’ business models impact on consumer engagement and switching, and are there barriers to entry for challenger firms? We will also look at international parallels from markets where reforms have taken place.
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Impact of regulation on retirement outcomes.Effective regulation needs to move with the times. Are there examples of FCA regulation that are overly burdensome and may constitute disproportionate barriers to entry or prevent useful product innovation?
The ROR focuses on the role of competition in the retirement income market, but is part of a wider package of FCA activities, broadly consisting of:
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supervisiondesigned to identify and tackle past problems and deter misconduct.
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policy workto implement and support the Government’s reforms and our regulatory approach.
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market analysis of how the market is operating and evolving with the reforms. This work is designed to put the market on the best footing for the future.
The FCA has also published the results of behavioural testing of the annuity comparison remedy that was proposed in RIMS. Although annuity sales have fallen since the pension freedoms have been introduced, significant numbers of consumers are still choosing to purchase an annuity.
For these customers, RIMS proposed the creation of an annuity comparator to improve competition and help them get a better deal when they purchase a guaranteed retirement income. The FCA's testing shows that depending on a variety of circumstances, the annuity comparator increased shopping around from 13% to 40%. As the research shows that the annuity comparator is an effective remedy, the FCA intends to consult on necessary rule changes later this year to introduce this as a requirement for firms.
In light of the wide-ranging programme of work already focused on financial advice, in particular the next steps of the Financial Advice Market Review, the scope of the ROR will not consider issues relating to access to financial advice, or the value and quality of financial advice.
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