Review decumulation advice, FCA tells firms
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The Financial Conduct Authority has sent ‘Dear CEO’ letters to the chief executives of advice firms telling them to review their retirement income advice, after it found instances of poor practice.
The letters follow a thematic review of retirement income advice which was conducted before the Consumer Duty came into force and published on Wednesday alongside the letter.
Sarah Pritchard, the executive director of markets and international at the FCA, said: “Decisions for consumers approaching retirement are complex, with the potential for risk. We want to support a sector that can help consumers access pension benefits, invest with confidence and have a sustainable income when they retire.”
Pritchard said that some firms are making a positive difference to their customers but that others were “not even getting the basics right and putting their customers’ futures at risk”.
“We urge all firms to take on board our findings and review their own processes. Where they do not, we will act,” she added.
Retirement income advice remains a focus area, the watchdog warned, saying it will follow up on the findings with firms. It will also carry out further supervisory work to explore the scale of the issues identified and tackle any harms.
Some examples of good practice were found in the review. Some firms had “clearly detailed processes, specific training on decumulation and used a range of tools to help illustrate complex information for customers”, the FCA said, and most of the reviewed advice was deemed suitable.
However, the regulator also found instances where firms “operated in a way unlikely to lead to good customer outcomes by not considering a sustainable level of income to support retirement and some instances of firms not providing the right information to customers”.
The letter sent to CEOs lists a number of areas for improvement:
- not taking account of individual circumstances when determining income withdrawals, or basing it on methods and assumptions that were “not justified or recorded”;
- risk profiling not being evidenced, being inconsistent with objectives and customer knowledge and experience or lacking consideration of the client’s capacity for loss;
- a failure to get necessary information about customers to demonstrate advice suitability, including expenditure or other financial provision, or not exploring future objectives or circumstances, including income needs or lifestyle changes;
- not always delivering a periodic review of suitability, where relevant, to customers that had paid for ongoing advice; and
- inaccurate or insufficient records being held as the control framework to enable customer outcomes to be assessed and track whether periodic review services were delivered.
To help firms, the FCA has published a Retirement Income Advice Assessment Tool and accompanying instructions, showing how it assessed advice files and how firms can see if their advice is compliant with its rules, including the Consumer Duty.
The FCA said it has also published a cash flow modelling article to help firms when undertaking modelling.
Advisers want simplified advice for decumulation
Advisers said it was helpful that the FCA has made its expectations clear, and urged it to include decumulation advice in the simplified advice model proposed in the recent Advice Guidance Boundary Review.
David Ostojitsch, director of government relations and policy at the Personal Investment Management and Financial Advice Association, said: “There will be areas of improvement in all markets, and in this context, it is helpful that the FCA has made its expectations clear and provided additional support for firms who may need it.”
He added: “Retirement income advice and decumulation will remain an ongoing focus, which is one reason why we called for decumulation advice to be offered under a simplified advice model in our recent response to the Advice Guidance Boundary Review.”
The FCA has previously said it considers decumulation too complex to fall under simplified advice, limiting this to ISAs with a value of up to £85,000.
However, other industry bodies have echoed the view that decumulation should be included, such as the Association of British Insurers, which also wants the investment limit to be raised to £225,000 to factor in the size of defined contribution pension pots in the 2050s.
Others prefer the FCA’s proposal of ‘targeted support’; provider Aegon said it has “game changing potential”.
Some believe retirement income advice will always be complex, however.
“Converting pension pots into cash and income is one of the most difficult areas in retirement planning, so it is no surprise that the FCA has found a number of shortcomings in the recently published thematic review of retirement income advice,” said William Burrows, a financial adviser with Eadon & Co, who also runs the Annuity Project.
Some believe retirement income advice will always be complex, however.
“Converting pension pots into cash and income is one of the most difficult areas in retirement planning, so it is no surprise that the FCA has found a number of shortcomings in the recently published thematic review of retirement income advice,” said William Burrows, a financial adviser with Eadon & Co, who also runs the Annuity Project.
“The advice process is complicated because not only are there many challenging technical issues, there are also many emotional and behavioural factors. In my experience, most advisers understand the complexities of pensions, but they lack the deeper understanding of retirement income decisions,” Burrows said.
One way to help advisers and their clients to make better decisions is to equip them with better information about the merits of annuities compared with drawdown, as well as more attention to the risk factors during retirement and a better understanding of the different biases which prevent advisers and their clients get the best outcomes, he argued.
“Retirement advice is an area where reading the textbook or passing an exam is not enough because there are many other factors to take into consideration.”
Could the FCA’s crackdown on retirement income advice have unintended consequences?
