As stated in the FCA’s Business Plan for 2016/17 their statutory objectives haven’t changed and they continue to talk about planning around risks so they can adopt a proactive approach which creates ‘constructive deterrence’. So can we expect more of the same?
The graphics in the first few pages of the document illustrate that we’re getting older (it’s certainly more difficult for me to get on my bike these days) and that each generation is taking longer to leave home, get married and get out of debt. There’s a lot of information about the state of the economy with low growth, low real wage increases and low interest rates. All of these have an impact on how people respond to their financial needs. These demographic developments are widely recognised and should already be influencing the design and marketing of financial solutions. So no real change?
Consumers consistently chose the products framed by ‘consumption’, even when other choices made better financial sense.
I reviewed the Business Plan looking for a thread that I can use in my client work and the one I found was the way in which the changing market for annuities will be impacted by and have an impact on firms’ culture and governance. The creation of a secondary market in annuities was announced by the Government as opening for business in April 2017 – two years after pensions freedom was announced. Firms are expected to have joined up thinking – it appears not to apply to our illustrious leaders.
In the Business Plan we find this statement: “From our behavioural economics work, we know that how choices are ‘framed’ has a major impact on consumer behaviour around financial services. In 2014, for example, we undertook a research experiment to see how framing affected the behaviour of consumers choosing annuities. Our study revealed that framing annuities as an ‘investment’ (how much it would ‘cost’) consistently led to consumers making very different choices compared to framing from a ‘consumption’ perspective (how much they would get in return). Consumers consistently chose the products framed by ‘consumption’, even when other choices made better financial sense. We published this research to help firms, advisers and the Government-funded Pension Wise service as they developed their communications in light of the new pension freedoms.”
This leads to the question: what did your firm do or change as a result of that published research – how many of us were even aware of it?
The FCA talk about increasing the accountability of individuals – the flip side of that, it seems to me, is that firms need to equip the individuals with the tools to understand the environment in which they work and the implications of the decisions they make; thus helping them to be accountable.
In my work I often encourage firms to create a risk matrix based on the likelihood of something going wrong and the impact if it did. Annuities provides a good hook for such an analysis – particularly as the FCA are promising a Retirement Outcomes Review in 2016/17. They have helpfully suggested they their focus will be on the ‘wake up’ packs and how they are used.
The perceived risks are specifically that of mis-selling and poor value – with FCA regulation bringing the risk of stifling the market. Remember that the last review found firms not effectively disclosing the availability of enhanced annuities or the benefits of shopping around. The latter now have to be specifically referred to in insurance renewal packs where the policy is being renewed for the fourth time. With the Senior Management Regime being transposed to all financial services sectors in 2018 it seems that firms should expect more intervention. Firms will have to make more effort to communicate with clients and protect them from the impact of poor decisions.
So we come to culture and governance; the risks identified are high level and firms should break them down into more detail and consider from a client perspective how well the product or service they offer meets the needs of the target market.
What concerns the FCA is that some firms just think more of the same and don’t stop to reflect on the real change that could result in greater consumer confidence – as trust in the financial services sector is built, the FCA expect to see an increase in business for the ‘good’ firms.
So what does this all mean for the T&C community? Behavioural finance tells us that we have preferred short cuts in our decision making and that being aware of these can help managers in making decisions about how to review their product offerings and what changes to make. The challenge may be in building a culture in which this knowledge is not used to take advantage of the fact that we know more than our consumers.
Perhaps part of the role for T&C is raising awareness of the FCA’s interest in the decision making process, particularly among those trying to decide how to arrange their income in retirement. Looking at risk matrices and understanding how aspects of products translate into client outcomes are critical – if the PPI scandal has taught us anything it has to be that individual businesses and the sector as a whole doesn’t need a repeat in the market for long term income planning. The annuity market is being impacted by the growth of drawdown products, the secondary market could be an opportunity to gain some of the momentum back but this will only be a positive outcome if it is driven by the genuine needs of consumers. Senior management are going to be held to account for this happening, awareness of this fact may make them more open to developing the skills required.