Investment pathways go live

We wrote recently about the coming of investment pathways and what it means for advisers. See here.

Although the rules are primarily aimed at drawdown providers, there is some very brief GUIDANCE for advisers that states:

  • When a firm is making a personal recommendation to a retail client about the investment of funds in the client’s capped drawdown pension fund or flexi-access drawdown pension fund its suitability assessment under COBS 9.2.1R(1)(a) should include consideration of pathway investments.
  • Pathway investments do not need to be considered where the personal recommendation is to purchase a fixed-term product that: (a) provides a guaranteed income, a guaranteed capital return or both; and (b) does not expose the client to investment risk, if the client remains in the product for the fixed term.

Now that we are beyond the go live date of 1 February, it is possible to actually see some of the investment pathway solutions that providers have created.  A quick Google search and click through to one or two provider sites will aid advisers’ understanding of what the pathways are and are not.

For example, clicking through to LV shows:

The investment pathways are the four statements that providers will have to ask of non-advised clients and the funds are the pathway solutions.

This link takes you to the fact sheet for Pathway option 1.

By definition, this fund was designed to be appropriate for a client who would relate to investment pathway statement number one. We don’t doubt that it is indeed appropriate, but it is important to note that different providers may well have different ideas of what asset allocation is appropriate – this is not an exact science.

Note the risk ratings. Pathway solutions are not risk free. Some pathway solutions are simply based on established funds. For example, the LV solutions are based on two L&G funds, one Vanguard fund and one LV fund. However, since some pathway funds might be brand new, there could be no investment performance data to consider for a while.

Note the fund charge, pretty low in the scheme of things (a wrapper charge of 0.20% would apply in addition) – other providers we have looked at seem also to be pitching at around the 0.25% level. There is no price cap on pathway solutions under the rules, but the value assessments now required of all funds do apply so it would appear that these new funds have taken that on board from outset.

The key point is that the pathway solutions are nothing mystical – they are just funds, albeit with some degree of matching to the broad statements above (as interpreted by the particular provider).

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

The pathway process was deliberately designed to avoid any possibility of providers straying across the regulated advice boundary. As a result, the pathway statements are VERY broad brush. If we saw, in the course of doing a file check, any of those in isolation as a client’s stated objective, we would certainly consider them to be a less than adequate identification of the client’s objectives. By definition, the process is aimed at non-advised clients and is not not intended to replace advice where that is in play. So, the GUIDANCE that suggests advisers should take account of pathway solutions in their assessment of suitability is likely to be readily satisfied where firms can demonstrate, for example, that the firm’s ‘preferred’ funds are of a similar cost and/or are more closely matched to the individual client needs and/or come with the benefit of ongoing reviews. Our current view is that firms should address how they consider investment pathways in their investment process.

Action Required By You

Firms should consider when investment pathway funds might be suitable as part of their investment process.
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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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