Advice Guidance Boundary Review: Targeted support starts to take shape

In December 2024, the FCA published Advice Guidance Boundary Review – proposed targeted support reforms for Pensions (CP24/27) (the ‘consultation’) alongside Pensions: Adapting our requirements for a changing market (DP 24/3).

The consultation follows a year of discussions between the FCA, Government and industry on the options available to narrow the advice gap and improve retirement outcomes. The targeted support (TS) concept attracted significant interest from both industry and consumer groups. In this consultation, the FCA is presenting a more detailed view of the TS framework and an opportunity for firms to engage again before rules are proposed by mid-2025.

At a glance
 

• The FCA is consulting (without rules) on proposals to establish a TS framework to help narrow the current advice gap in pensions and retail investments. Firms have until 13 February 2025 to respond. A consultation with rules is expected by June 2025.
•  Implementing the TS framework will require clear definitions of how and to whom TS can be delivered. It will also require a determination of where it will fit within the current regulatory framework and the regulated activities perimeter. The FCA is proposing the TS framework includes a design and a delivery phase where firms need to determine pre-defined scenarios, define customer segments and develop ready-made solutions which are then matched and verified to customers before delivery (see figure 1).
• Under current proposals we see the key difference between TS and regulated advice being that TS is aimed at the customer segment level while advice is individual to each customer. Under TS, firms will need to ensure customers receive better outcomes than if TS had not been provided. As a result, TS is likely to be a complex framework to implement and firms will need to develop it carefully to ensure regulatory compliance.
• The FCA proposes to apply a combination of existing requirements and more specific new standards to manage the risks related to providing TS. Firms will also be required to review their TS processes and solutions annually.
• The next few months are the right time for boards and senior executives to consider how TS might fit into the firm’s strategy. To this end, firms will need to determine what additional information - if any - they need to make a decision about whether or not to offer TS, how they will charge for it and how TS may change the competitive dynamics of their market.

Scope
 

Although the FCA is focusing on the application of a TS framework for pensions in particular, it is expected that the TS framework will then be extended and work in broadly the same way for retail investments more generally. This means that all firms offering pensions (life insurers and pension providers) and/or retail investments, such as financial advisers, investment platforms, fund managers and retail banks, will be keen to engage with the FCA and should consider responding. The consultation runs until 13 February 2025 and the DP until 27 February 2025.

Context and regulatory landscape
 

This consultation forms part of a broader set of pensions reforms (see Figure 2) from the FCA, HMT, DWP and TPR in response to the growing importance of the Defined Contributions (DC) market in the UK. Many proposals aim to foster fund consolidation in the sector, to channel pensions savings to the economy and improve retirement outcomes for consumers.

What is the new TS framework?
 

Targeted support was one of the three options suggested by the FCA in DP 23/5 to narrow the advice gap. Under current proposals, the TS framework could help narrow the gap between guidance and advice. Implementing the TS framework will require clear definitions of how and to whom TS can be delivered. It will also require a determination of where it will fit within the current regulatory framework and the regulated activities perimeter. It is likely it will require the introduction of a new specific regulated activity. This means that the TS framework will require both new legislation and regulations to create the necessary legal and regulatory foundation.

Under the proposals, two key concepts underpin the TS framework:

• ‘Consumer segments’: are pre-defined groups of consumers with common characteristics which are central to the provision of TS. The solutions offered under the framework should be aligned with the common characteristics of the consumer segment for which they are designed and should offer fair value/deliver good outcomes.
• ‘Better outcomes threshold’: firms should have reasonable grounds for believing TS solutions will deliver better outcomes for customers than not offering targeted support.

Figure 1: Understanding the proposed TS journey

The TS framework would include two journey phases (see Figure 1):

A) Design: this is an internal phase where firms need to pre-define scenarios where customers could benefit from TS, pre-define consumer segments, determine the information needed to match consumer segments to scenarios and develop ready-made solutions to deliver better outcomes for the consumers in the pre-defined scenarios.

B) Delivery: this is the consumer‑facing phase of the journey where firms should identify that a consumer falls into a pre-defined scenario, verify it belongs to a consumer segment and deliver the appropriate ready-made solution for that segment/scenario combination.

The verification process will not involve an individual assessment of needs but a check that customers align with the common characteristics of the consumer segment, thus confirming the appropriateness of the ready-made solution. This process will be subject to new conduct standards discussed below.

The industry will welcome the FCA’s confirmation that:

• TS can involve suggesting specific products and actions (this would be advice in the present regime);
• firms should have flexibility in how to design their ready-made solutions; and
• TS should be an opt-out service for customers where firms choose to provide it.

The FCA’s aim is for TS to narrow the advice gap in the pensions and retail investments markets. Some might picture TS sitting in-between guidance and regulated advice provision. However, under current proposals we believe the core difference between TS and Advice lies in TS being designed at the customer segment level while advice is individual to each customer. As a result, TS is likely to be a complex framework to implement and firms will need to develop it carefully to ensure regulatory compliance. At this stage it is not yet clear how significant the reduction of the compliance burden for TS will be relative to the advice model.

How will TS be regulated?
 

The FCA proposes to apply a combination of existing requirements and more specific new standards to manage the risks related to providing TS. Firms will also be required to review their TS processes and solutions annually.

Disclosures: at this stage the FCA is not proposing to prescribe the format of TS disclosures, but does expect firms to design their TS communications carefully and test them for effectiveness. The FCA proposes that firms communicate with customers at three touchpoints of the TS journey: on first contact with the consumer, to gather information and to provide the ready-made solution.

The provision of TS will therefore be subject to a range of existing requirements and firms will need to consider how these requirements interact with the way they plan to implement TS. Below we include the most salient rules that are expected to interact with the new framework:

Key considerations and actions for firms
 

Although the TS framework is still under development, the consultation provides sufficient detail for firms to start considering the commercial, financial and operational implications of the proposals. In our view key aspects for consideration and action include:

• Shaping the framework: TS is an important and potentially valuable new way of offering solutions to customers and narrowing the advice gap. However, under the proposals this will not be a simple framework for firms to implement or comply with. It will require careful and ongoing monitoring of outcomes with potentially high regulatory and compliance risks. Since this is a consultation without rules, there is a lot that can still change. Firms should consider responding with a focus on identifying areas of the proposals that might have a negative effect on adoption of the new framework. In practice, we expect many firms might be willing and able to implement TS within a small range of simple ready-made solutions that will be relatively low risk (some of the consultation examples fall into this category such as suggesting increasing pension savings rates to some customers). Over time, some firms might go on to innovate and develop more sophisticated solutions which are likely to require greater implementation and compliance efforts, but we expect this to evolve once firms gather more information and feedback on the framework’s performance. 
• Data needs: firms will need access to data about consumers to verify they match the consumer segment. This exercise requires due care and skill, with challenges around data processing, data protection requirements, ensuring customers understand the service is not advice and ensuring both data and segment allocations remain up to date. Some firms might access data from third parties and, if they do, they should subject them to checks and verifications similar to those they deploy internally. Firms will need to assess their current data capabilities and gaps in the context of the TS framework and determine if they need to act to close them.
• Charging model: how firms will get paid for the cost of delivering TS is at the heart of its potential success. Allowing firms to make the service opt-out and free of charge is a positive step to maximise the take-up rate of the service. The FCA is proposing that firms will be free to determine the appropriate charging structures. Where firms use cross‑subsidies they need to ensure they still provide fair value for all customer groups. Remuneration through commission payments will not be allowed.
• Authorisation: he FCA expects life insurers, asset managers and direct‑to‑consumer platforms to be the main providers of TS. To enter this market, firms will need to demonstrate they have tested thoroughly how their TS proposition meets the Duty requirements, developed a clear customer journey, met the relevant conduct standards of the TS framework and have appropriate governance and oversight of the framework and relevant controls. Firms that believe they will want to offer TS should start considering how best to prepare to meet the additional requirements.
• Market‑wide competition implications: the FCA expects larger vertically integrated firms to be more likely to provide TS given the regulatory and data requirements of the new framework as well as their ability to suggest their own products as TS solutions. This is likely to create further concentration in the DC pensions market. Smaller firms and those that are not vertically integrated might find it challenging to develop a viable business model for TS. Participants in the pensions and wider retail investment markets should consider the potential implications of the introduction of the new framework to their ecosystem to identify opportunities and threats to their current business models and develop a suitable action plan.

What to expect next?
 

Beyond TS, the FCA and the Government are proposing a large number of initiatives to improve outcomes in the pensions market. The timeline in Figure 2 illustrates the sheer number of legislative and regulatory initiatives currently in progress or early development. This is a complex landscape, and firms will need to take a holistic view of the effect of these initiatives on their businesses. We expect the next 12 months to be crucial in shaping the DC pensions landscape for the coming decades and, as a result, firms should plan to engage with the FCA while assessing how to prepare for the changes ahead.

Conclusion
 

The new TS framework is slowly taking shape and this consultation gives firms another chance to provide feedback to the FCA. The regime being proposed is not a simple framework to offer more detailed guidance but a new way for firms to offer a wider range of products and services to consumers while improving outcomes. The potential complexity and high compliance costs of the new framework might deter some from entering the market. However, it is clear that many firms will be eager to make a commercial success of it. The next few months are a good time for boards and senior executives to consider how TS might fit into the firm’s strategy. To this end, firms will need to determine what additional information if any they need to make a decision about whether or not to offer TS, how they will charge for it and how TS may change the competitive dynamics of their markets.