AJ Bell chief executive Andy Bell has warned the Financial Conduct Authority (FCA) that the proposed investment pathways reform could make savers think they have been advised when they have not, leading to a barrage of claims from ambulance-chasing lawyers.
In a letter addressed to the newly appointed FCA chief executive Nikhil Rathi, Bell said the investment pathways proposals were "fundamentally flawed" and could end up causing long-term consumer damage.
Under the proposed rules, people who enter drawdown or transfer funds to a new drawdown account will need to be offered ready-made investment pathways based on their answers to basic questions about how they plan to spend their retirement pot.
Investment pathways risk funnelling people into investments that do not suit their needs or retirement priorities."
Pathways will also need to be offered to non-advised drawdown customers each time they make a subsequent investment decision. It was originally due to be introduced in August 2020 but as a result of Covid-19, the implementation date has been delayed until February 2021.
Bell said they were a "mandate for providers to sell expensive in-house funds."
"Investment pathways risk funnelling people into investments that do not suit their needs or retirement priorities and are a mandate for pension providers to line their pockets by peddling their own in-house funds with little or no control on fund charges," he said.
Bell said that if investment pathways had been in place before the Covid-19 markets dip hit in March and April, providers would have faced a raft of complaints from angry customers who had lost money after it was suggested they put all their cash in a single investment.
"The already uncertain lines between advice and guidance will become even more blurred and these customers will feel and claim they have been advised, when they have not," he said.
"In fact, one of the main beneficiaries of these reforms will be ambulance-chasing lawyers, who will undoubtedly be salivating in anticipation of this opportunity being spoon fed to them by the FCA."
Bell said the proposal could shepherd non-advised drawdown customers into a single investment solution based on their answer to one ambiguous multiple choice question.
"The regulator appears to be conducting a huge experiment with thousands of drawdown investors without ever properly testing whether it will actually work in the way it intends," he said.
"The pension industry has to make these rules work with existing drawdown processes that vary significantly across the industry. That increases the cost to the industry and ultimately to customers.
"The regulator now needs to re-engage with the industry to understand just how wide of the mark its initiative is from its target."
This article was first published by our sister title Investment Week
Firm to clawback $174m from executives