Regulation, defaults and consumer outcomes
Peter McGahan
Monday 24th August, 2026.
THERE is a lovely idea that if you make something cheaper, clearer and easier, you have automatically made it better. Sometimes you have. Sometimes you have just made it easier for everyone to walk into the same hamster cage.
This is not a criticism of the intention behind regulation. The Retail Distribution Review cleaned up a grubby part of financial services. Commission from product providers was removed from new retail investment advice, qualifications improved and charges became more visible. Good. I would not want to go back to the days when an investor could be told advice was “free” while the cost was quietly loaded into the product like a rodent in a cereal box.
But regulation changes behaviour. It changes what providers build, what advisers fear, what compliance departments approve and what pension schemes choose for people who will never read the fund factsheet.
After the Retail Distribution Review, visible charges mattered more. In workplace defined contribution pensions, automatic enrolment created millions of savers who were rightly placed into defaults (a default fund you get if you don’t make your own choice). Default funds then had to sit inside charge caps and governance reviews. Now the Financial Conduct Authority’s (FCA) value for money work is pushing the industry to measure investment performance, costs and service quality more consistently.
Again, all sensible. Nobody should be overcharged in a pension they did not actively choose. Nobody should be left in a poor-value default, just because inertia is profitable. Nobody should pay active fees for a fund that hugs the index like a toddler on the first day of school…and the second too…
Good rules can also create bad shortcuts.
If the easiest thing to evidence is low cost, the lowest-cost answer starts to look like the safest answer. If committees must show consistency, comparability and clean governance, a passive-heavy default becomes attractive. It is cheap, scalable, easy to explain, easy to benchmark and hard to criticise in a meeting. Nobody ever got dragged across the coals for choosing the thing that looked cheapest on page one.
But value is not price. A helmet made of meringue is marvellous value until you fall off the bike.
A passive-heavy default may be entirely appropriate for many savers. The problem is when passive becomes the institutional reflex rather than the investment judgement. The question changes from “what is best for these people over forty years?” to “what can we justify most easily to the board, the regulator, the employer and the complaints team?”
That is where consumer outcomes can drift.
A low-cost fund can still be concentrated. It can still be heavily exposed to the largest companies, the most expensive market, a fashionable sector or a currency the saver does not understand. It can still sell in falling markets because its rules require it. It can still give a saver approaching retirement a nasty lesson in sequencing risk if the glidepath, asset mix and withdrawals are poorly designed.
The saver sees a default. The provider sees a governance process. The market sees another automatic flow into the same large companies.
This is not mis-selling. It is more subtle than that. It is the system doing exactly what it was encouraged to do, then being surprised by the outcome.
The regulator is not blind to this. The FCA has recognised that passive investing lowers costs and improves competition, but also that active management supports research, trading and monitoring which help equity markets work properly. It has also said fair value is more than price. I’m typing this on a plane. I don’t want a cheap pilot.
Value for money should not become a race to the cheapest default with the neatest traffic-light rating. Proper value includes suitability for the target market, resilience in different market conditions, diversification, communication, governance, liquidity and whether savers understand the main risks.
The “value” in value for money should carry as much weight as the “money”. I repeat.
For advisers, trustees and providers, the task is to avoid turning good regulation into financial monoculture. Passive funds are useful. Defaults are necessary. Charge control protects people. Standardisation can improve consistency. But none of these replaces judgement.
A garden with only one type of plant is easy to maintain. It may even look tidy. Then the wrong disease arrives and the whole thing is compost. Google biodiversity.
Financial services have spent years learning that complexity can hurt consumers. That lesson was needed. The next lesson is that over-simplicity can hurt them too.
A default should be a carefully designed starting point, not a regulatory hiding place.
I will be creating a guide to investing, so, if you would like a complimentary copy, please email info@wwfp.net.
Peter McGahan is the Chief Executive Officer of Independent Financial Adviser firm, Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
