The Quiet Revolution

‘Every penny counts’ is actually a quote from Davis Fairs, Executive Director of Regulatory policy, The Pension Regulator (TPR), who joined with the FCA in 2021 to ‘outline a framework for value for money in defined contribution pension schemes’.

This article looks at the two key aspects of research, such as can be found in the new Synaptic Pathways research solution: disclosure and comparison. We will look at some of the regulatory framework around ‘value for money’ and how firms can standardise disclosure and comparison in their advice process, by including a standard Synaptic report in the client file, with every investment recommendation made.

It is also worth noting in respect of the FCA and TPR discussion paper, that pension-related income is the mainstay of UK advisory firms, and ABI data and other surveys suggest the average figure may be around 70%. This is hardly surprising considering the FCA and TPR jointly regulate around £3 trillion of pension assets. The ‘value for money’ proposals focus on providers and manufacturers, but the principles extend across the ‘value chain’. The authorities are committed to protecting consumers and getting them a ‘better deal’, which of course includes the fees charged by advisers. It is one of the reasons why adviser charging is included in the PROD rules, where advisers are expected to work out a fair charging regime for investment solutions matched to target audiences.

Funds-under-advice outside of workplace schemes are our principal area of interest today, and the discussion paper FCA DP 25/5 makes it clear that it agrees with feedback from the industry that ‘consistency’ in the rules is important. So the industry is working towards a single framework for disclosure and illustrations. This points to the sense in advisers maximum transparency is terms of costs disclosure across the board, something the Synaptic research is able to support.

For financial advisers who conduct investment research for clients out of the workplace there are two regulatory frameworks, and though they appear to be independent and vary in detail, it is clear that they share the same principles. The Insurance Distribution Directive (IDD) is considered to be relatively lower risk to MiFID II, due to the higher level of reliance on institutional management of fund. The disclosure and reporting requirements of IDD are therefore less onerous than MiFID II. In practical terms, IDD investments do not need to disclose ‘transaction costs’ or ‘distribution costs’, but COBS (non-MIFID II) rules do require the following:

• Annual reporting.
• Relevant costs and value of each underlying investment.
• Total costs that have been incurred in the relevant reporting period (usually previous year).
• The ability to be stored so they can be retrieved (durable medium).

COBS, MiFID II, PROD, IDD are all governed by the same principle – the need to provide transparency around costs and charges. That is why Synaptic Pathways has a research methodology that is consistent across any recommendation – including forecasts for the outcome of any investment scenario and a full costs and charges disclosure, whether new money basis or review. The forecasts also include the impact of costs on the growth of the investment, and if a review, forecasts for costs in the forthcoming year and summary of costs in the previous year. It doesn’t matter if you are recommending a MiFID II product or an IDD product, or switching between the two, Synaptic creates a compliant record of the previous state, the current state and the proposal. It is a standard output so no decisions are required in pulling together the report.

We have asserted that disclosure is only half the battle. Establishing ‘value for money’ requires the identification of suitable options and a demonstration of competitiveness in pricing, consistent with the forthcoming ‘Consumer Duty’ fiduciary rules. Synaptic helps by producing comparative research in relation to costs by providing a table of results showing a comparison of Reduction in Yield calculations for the different investment options available, prior to a final recommendation. Optionally, this is an integral part of the ex-ante journey, ensuring that each recommendation can be accompanied by proof of value for money.

This is unique to Synaptic because no other standalone tool has the ability to identify the full range of costs and charges required in such a calculation. In fact, a standard piece of research of this type can extend to millions of calculations, when all the options relating to multiple platforms, products, portfolios and funds are taken into account. Synaptic allows you to:

• Overlay adviser charging.
• Work within your Central Investment Proposition.
• Include special deals and discounts.
• Automatically identify the cheapest share class available in each wrapper.
• Include comparative cost analysis in the context of a pension switch.

Synaptic gives you the tools to produce illustrations, including full costs and charges disclosure. Here is a screenshot of the user journey, showing the final fund values and the Reduction in Yield calculation for each investment option.

Here is the MIFID II disclosure in table form.

Here is how costs and charges around switching can be easily calculated:

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