Last year, the FCA selected 1,300 firms to complete a survey as part of its thematic review into retirement income advice. The 60-page survey contained 87 questions, covering a broad range of areas, and the FCA expects to publish its findings later this quarter. In the run up to this publication, here are our thoughts on what the FCA is likely to focus on.
Is existing regulation effective?
While advice relating to defined benefits pensions is governed by stringent rules, the FCA currently takes a much less prescriptive approach when regulating other forms of pension advice. While this is intended to encourage advisers to act in their clients’ best interests, rather than just tick boxes, it also means that there can be some confusion over what is and isn’t required.
In the upcoming thematic review, we think the FCA is likely to look at how effective their current guidance is in ensuring that the advice given to clients is suitable. Would the DC pensions space benefit from more rigid, DB-style rules? Is this likely to improve outcomes for clients?
The FCA could also look at this from another angle: how much of a burden is current FCA guidance placing on financial advisers? If advisers have to spend a lot of time making sure they’re complying with regulation, this reduces the amount of time they have available to spend with their clients. Expenses incurred as a result of keeping abreast of FCA regulation are also likely to be passed onto clients, making advice less affordable and worsening the ‘advice gap’.
Are annuities being given enough consideration?
Until recently, annuity rates were so low that they often weren’t given much consideration except for the most risk-averse clients. Now that annuity rates have increased, the FCA might use this thematic review to examine whether enough thought is being given to annuities as a retirement income solution.
Something else that the FCA might be interested in is whether there is a conflict of interests coming into play when discounting annuities as a suitable solution for a client. After all, recommending that a client keeps their pension invested means that they will need ongoing advice and the adviser can charge for ongoing advice.
How are firms determining sustainable withdrawals for their clients?
There are a few different schools of thought when it comes to what constitutes a sustainable withdrawal method in retirement, and advisers are free to align with whichever camp they choose. While we don’t think the FCA is likely to be interested in the merits of one sustainable decumulation strategy over another, we do think that they might focus on the rationale and evidence behind the withdrawal method an adviser recommends, and whether this is suitably recorded. In fact, across the board we expect the FCA to focus on consistency of processes.
What tools are firms using to help with advice?
Third party risk profiling and cashflow software are commonly used by advisers when giving retirement income advice. There are many options available to advisers, and much like with sustainable withdrawal methods, we don’t think that the FCA is going to have much of an opinion on which software you should use.
Again, what they might be interested in are your processes and how these are applied consistently. The FCA could look at how advisers incorporate these tools into the advice process, including the assumptions that are made when using them and whether any tweaks are necessary for clients at retirement.
Are advisers identifying clients’ real objectives?
The FCA has repeatedly mentioned that cookie-cutter objectives aren’t sufficient and that, to really prove that advice is suitable, client objectives should be highly personalised, with their own words included if possible. This is particularly important in retirement income planning, and impersonal objectives like “The client wants to access their tax-free cash” are unlikely to be enough to prove suitability.
The FCA might focus on whether advisers are taking the time to really find out what the client wants to achieve, and whether advisers are providing a healthy push back against client requests that might not necessarily make financial sense (for example, withdrawing tax-free cash to sit in a bank account alongside already sufficient savings).
Is the Consumer Duty making a difference?
We wouldn’t be surprised if the FCA uses this thematic review to get an insight into how the Duty is being applied. The survey asked questions on target market assessments and segmentation, along with other Consumer Duty-related queries. Given the focus on Consumer Duty in 2023, we would be surprised is this didn’t feature in the FCA’s findings.
Final thoughts
In December, the FCA confirmed that they had completed their review and were analysing their findings. The report is due to be published by the end of this quarter and will cover a wide range of topics related to retirement income planning. We should have more certainty on which areas are of concern to the FCA by the end of March. Regardless of the content of the report, now is the perfect time to get one step ahead and make sure your Centralised Retirement Proposition and other due diligence documents are up to date in anticipation of the FCA’s report. If you need some inspiration for your CRP, here are some of our previous articles on this topic: