FCA Handbook - COBS 19.12 Non-workplace pensions: default options and cash warnings

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COBS 19.12 Non-workplace pensions: default options and cash warnings

Definitions

In COBS 19.12:

(1)
‘cash warning’ is the warning in COBS 19.12.31R;
(2)
‘distributes’ includes having an arrangement with a third party to arrange an investment, or to promote platform services that distribute investments;
(3)
‘filtering tool’ means a tool whereby a firm makes the list of the investments it sells easier to search by allowing the customer to filter products based on factors presented by the firm and selected by the customer, and showing to the customer the investments that meet the factors selected by the customer; and
(4)
‘pre-purchase questioning tool’ means a tool which involves putting a sequence of questions in order to extract information from a person to help them best select an investment that meets their needs. A decision tree is an example of a pre-purchase questioning tool. The process of going through the questions will usually narrow down the range of options that are available.

References to ‘advice’ (as that term is afforded its natural meaning) include targeted support services, unless specified otherwise.

Application of default option rules

COBS 19.12.10R to COBS 19.12.22G apply to an operator of a non-workplace pension scheme that:

(1)
offers, distributes or promotes investments, or promotes platform services that distribute investments, in relation to their inclusion in a non-workplace pension of the operator; or
(2)
accepts, for inclusion in a non-workplace pension, investments which are offered, distributed or promoted by another person where that other person, or another person connected to it, also arranges for the retail client to enter into the non-workplace pension with the operator.

The effect of COBS 19.12.2R is that COBS 19.12.10R to COBS 19.12.22G:

(1)
do not apply where an operator only arranges an investment for inclusion in, or the provision of platform services in respect of, a retail client's non-workplace pension, at the request of the retail client. In these circumstances, therefore, the operator does not offer, distribute or promote any investments, nor does it promote platform services that distribute investments.
(2)
apply where an operator accepts, for inclusion in a retail client's non-workplace pension, an investment offered, distributed or promoted by a third party, including a platform services provider or an introducer, where that third party or someone connected to that third party also arranges for the retail client to enter into the non-workplace pension with the operator unless the retail client has received or will receive, either as part of transactional or ongoing advice, a personal recommendation in relation to the investment of their contributions to, or assets in, the non-workplace pension (see COBS 19.12.5R).

COBS 19.12.10R to COBS 19.12.22G do not apply where an operator starts treating a retail client's workplace pension arrangements as a non-workplace pension after the retail client has become a deferred member of the relevant qualifying scheme, so long as the firm does not offer, distribute or promote to the retail client any investments or platform services other than those available in connection with the former workplace pension arrangements, including the default arrangement and any investments available on a self-select basis.

Exclusion from default option rules in relation to advised clients

COBS 19.12.10R to COBS 19.12.22G do not apply in relation to a non-workplace pension where the firm has determined, on reasonable grounds, that the retail client:

(1)
has received or will receive, either as part of transactional or ongoing advice, a personal recommendation in relation to the investment of their contributions to, or assets in, the non-workplace pension; or
(2)
has appointed an investment manager in relation to the investment of the retail client's contributions to, or assets in, the non-workplace pension.

Definitions

COBS 19.12.10R to COBS 19.12.22G do not apply in relation to a non-workplace pension where the firm has provided a targeted support service to the retail client, or the firm arranged for another firm to provide that targeted support service, and:

(1) the targeted support service includes a recommendation to the retail client on how to invest their contributions to, or assets in, the non-workplace pension; and
(2) the retail client has accepted and is taking steps to action the recommendation referred to in (1).

Exclusion from default option rules in relation to advised clients

A firm will not have reasonable grounds to determine that a retail client has received, or will receive, a personal recommendation for the purpose of COBS 19.12.5R(1) if the determination is based solely on information that:

(1)
is over 12 months old;
(2)
the retail client is in, or transferring from, an advised product; or
(3)
the retail client provides remuneration to an adviser in relation to other investments.

Application of cash warning rules

COBS 19.12.23R to COBS 19.12.33G apply to an operator of a non-workplace pension scheme.

COBS 19.12.23R to COBS 19.12.33G do not apply in relation to a non-workplace pension where the firm has determined, on reasonable grounds, that the retail client has appointed an investment manager in relation to the investment of their contributions to, or assets in, the non-workplace pension.

Purpose

(1)
The purpose of this section is to specify the circumstances where a firm must:
1. (a)
  offer a default option to a non-advised client in connection with their non-workplace pension; and
2. (b)
  provide warnings to a retail client who has invested, for a sustained period of time, over a certain percentage of their non-workplace pension in cash-like investments.
(2)
The default option rules in COBS 19.12 are designed to help non-advised clients who are generally unable or unwilling to engage with investment decisions, or find it difficult to identify appropriate investments for inclusion in their non-workplace pensions, including where questionnaires or filtering tools are used. The purpose of the rules in COBS 19.12 is to help these non-advised clients to choose an appropriate investment option.

Requirement to offer a default option

A firm must offer its retail clients a default option for inclusion in the non-workplace pensions it operates for those clients.

A firm must not:

(1)
offer more than one default option to each retail client; or
(2)
make the decision as to which default option to offer to each retail client by depending on the retail client's answers to questions set out in a pre-purchase questioning tool or a filtering tool.

A firm may, as a single default option, offer a series of different target date funds that depend on retail clients’ target retirement dates.

When and where to offer a default option

A firm must offer the default option:

(1)
at the time the retail client enters into the non-workplace pension operated by the firm (regardless of whether an initial cash contribution is made at this stage); and
(2)
again at the time the retail client makes their initial cash contribution (if one has not already been made on entry) into the non-workplace pension,

unless the retail client is, at the point of entry into the non-workplace pension with the firm, only transferring in investments they already hold elsewhere and will continue to use the investment strategy associated with those investments when making requests of the firm.

Where a retail client:

(1)
makes their initial cash contribution at the point of entry into the non-workplace pension with the firm, the firm will need to bring the existence of the default option to the attention of the retail client at that stage; and
(2)
makes their initial cash contribution after the point of entry into the non-workplace pension with the firm, the firm will need to comply with COBS 19.12.13R by offering the default option both at the stage at which the client enters the non-workplace pension and again at the point they make their initial cash contribution.

Additionally, where a firm, or any other person involved in the offer, distribution or promotion of investments for inclusion in a non-workplace pension of the firm:

(1)
sets out, in menus or otherwise, the other investments available to the retail client for inclusion in their non-workplace pension, the firm must set out the default option in a location most likely to bring it to the attention of that retail client;
(2)
makes available pre-purchase questioning tools or filtering tools that enable a retail client to select investments for inclusion in their non-workplace pension, the firm must set out the default option alongside those tools.

It is unlikely that complying with COBS 19.12.15R(1) would require a firm to set out the default option in every menu, or in every level of a menu, where other investments are set out.

How to present the default option

A firm must present a default option:

(1)
when complying with COBS 19.12.13R, prominently and on a standalone basis; and
(2)
when complying with COBS 19.12.15R, with at least equal prominence to any other investment, pre-purchase questioning tool or filtering tool made available to retail clients alongside the default option.

When complying with COBS 19.12.13R and COBS 19.12.15R, a firm must ensure that it:

(1)
labels a default option in a sufficiently clear way to give an indication of the nature of it and also to distinguish it from the firm’s other offerings;
(2)
sets out, in a clear and prominent way, the aims of the default option, explains that the default option has been designed to meet the needs, objectives and characteristics of a typical non-advised client in the target market for the default option, and sets out what the manufacturer considers those needs, objectives and characteristics to be; and
(3)
makes it clear that the default option is not tailored to the specific needs, objectives or characteristics of each retail client, and that if the retail client:
1. (a)
  considers that their needs, objectives and characteristics may fall outside those of the typical non-advised client in the target market as described by the firm, they may wish to consider other investment options;
2. (b)
  wishes to ensure that the non-workplace pension and any investments included in it (including the default option) are suitable for them, the retail client should consider seeking investment advice.

Preparing to offer a default option

A firm must be in a position to offer a default option in good time before it has to offer the default option pursuant to COBS 19.12.10R, in order to allow for sufficient internal product governance.

The default option may be manufactured by either the operator alone, by another firm, or by both, and distributed by either the operator alone, or by the operator and another firm.

Manufacturers and distributors of default options must comply with the applicable product governance requirements in result matched startPRODresult matched end. Where the manufacturing is done by another firm (either alone or with the operator), the operator is still responsible for the obligations under COBS 19.12.10R to COBS 19.12.18R.

(1)
Where firms decide to replace a default option, they may need to consider whether it would be appropriate to transfer existing clients to the new default option.
(2)
This may be the case, for example, if the transfer is required to prevent consumer harm and avoid risking non-compliance with our rules, for example Principle 6. This could be the case where firms determine that the default option no longer meets the applicable product governance requirements in result matched startPRODresult matched end and existing clients are likely to suffer harm as a result.
(3)
If firms decide to transfer existing clients to a new default option, they will need to consider the information needs of their clients, and communicate to them appropriately and in good time, in a manner that is clear, fair and not misleading.
(4)
Firms are required to have appropriate contractual arrangements in place (including contractual powers that are fair and transparent and comply with the CRA) to enable them to transfer existing clients to a new default option and to comply with their obligations under the regulatory system.

Cash warnings: conditions

At least once during every 3-month period, for each of the non-workplace pensions that retail clients have entered into with the firm, the firm must assess whether the following conditions are met at the time of the assessment:

(1)
more than 25% of the non-workplace pension is invested in cash-like investments, excluding any cash-like investments held in connection with lifestyling or within a target date fund;
(2)
the amount of the cash holding in (1) is greater than £1,000;
(3)
the conditions in (1) and (2) were also met in all the other assessments carried out during the 6-month period preceding the day of the assessment; and
(4)
the retail client is more than 5 years away from:
1. (a)
  normal minimum pension age, as defined in primary legislation from time to time; or
2. (b)
  if lower, a protected pension age.

For the purposes of COBS 19.12.23R, the start of the 3-month period is

(1)
initially determined by reference to the date members enter into their non-workplace pensions with the firm; and
(2)
after the initial 3-month period, by reference to the date when, for each retail client, the firm last carried out, or should have carried out, the assessment under the rule.

Cash warnings: timing

If all the conditions in COBS 19.12.23R are met, the firm must provide the retail client with a cash warning within an appropriate timeframe after the date when the assessment in that rule was carried out.

For the purposes of COBS 19.12.25R, an ‘appropriate timeframe’ is likely to be within 3 months of carrying out the assessment in COBS 19.12.23R, unless the current market conditions would make it inappropriate to warn the retail client about their cash holdings within that timeframe, although providing the cash warning later than 6 months after the date of the assessment is unlikely to be appropriate.

If a firm has provided a cash warning pursuant to COBS 19.12.25R, the requirement in COBS 19.12.25R does not apply again until after 1 year of the firm providing the previous cash warning.

Notwithstanding COBS 19.12.27R, a firm can choose to provide a new cash warning during the year following the previous cash warning, in which case COBS 19.12.27R would apply from the date when the new cash warning is provided.

Where the condition in COBS 19.12.23R(4) is no longer met, a firm should consider whether it would be appropriate to keep providing the cash warning up until the time a retail client accesses their pension.

A firm may send the cash warning with other client communications, provided that the cash warning is included in a document separate to those other client communications.

Cash warning: form and content

The cash warning at COBS 19.12.25R must:

(1)
be provided in a durable medium;
(2)
using plain language, warn the retail client that:
1. (a)
  more than 25% of their non-workplace pension is invested in cash-like investments; and
2. (b)
  the value of their non-workplace pension is at risk of being eroded by inflation;
(3)
include a generic example (provided as an explanation, an illustration or both) of how inflation erosion would affect a £10,000 cash pot over 10 years, assuming 0% interest and using a measure of inflation generally accepted in the United Kingdom; and
(4)
inform the retail client that they should consider whether their current investments are likely to grow sufficiently to meet their objectives.

The firm should also:

(1)
inform the retail client that:
1. (a)
  the cash warning is not advice or a substitute for it; and
2. (b)
  the value of any investment can fall as well as rise;
(2)
explain to and/or illustrate for the retail client that different types of investment have a different balance of risk to potential gain; and
(3)
include in the cash warning a statement to the effect that, where applicable, the firm makes available investments for inclusion in non-workplace pensions, including the default option.

In the FCA's view, the Consumer Prices Index is a national index of retail prices and so may be used as a measure of the current inflation rate for the purposes of COBS 19.12.31R(3).

Record keeping

A firm to which the record-keeping rules in SYSC 3 (Systems and controls) or SYSC 9 (Record-keeping) apply will need to maintain a record of its compliance with the requirements in this COBS 19.12 section including, where relevant, how it has determined on reasonable grounds (including records of the evidence it has relied upon) that, in accordance with COBS 19.12.5R, a retail client is not a non-advised client.

A firm must also maintain a record of:

(1)
the number of non-advised clients entering into a non-workplace pension with the firm each year;
(2)
the number of those retail clients in (1) who chose the default option;
(3)
the number of retail clients not included in (1) that choose the default option each year, distinguishing between retail clients who were clients of the firm before COBS 19.12.10R to COBS 19.12.22G came into force and those who became clients later;
(4)
the volume of contributions made by retail clients to the default option each year;
(5)
the volume of assets under management attributable to the default option;
(6)
a description of the product approval process for the default option and of any reviews undertaken in compliance with PROD 6;
(7)
in relation to cash warnings, differentiating between advised clients and non-advised clients, as well as between those retail clients who were clients of the firm before COBS 19.12.23R to COBS 19.12.33G came into force and those who became clients later:
1. (a)
  the dates when assessments were carried out, alongside the number of retail clients assessed on those dates;
2. (b)
  of the retail clients in 7(a), the number who met the conditions at COBS 19.12.23R; and
3. (c)
  of the retail clients in 7(b), the number who continue to meet the conditions at COBS 19.12.23R in subsequent assessments.