The Financial Conduct Authority (FCA) has today written to the Chief Executives of financial advice firms asking them to review their processes when providing retirement income advice.
The letter comes following the FCA’s thematic review of retirement income advice which examined how firms were providing advice.
The review identified examples of good practice in the market with some firms showing they had considered their customers’ needs and designed their advice model in a way likely to lead to good outcomes. Some firms had clearly detailed processes, specific training on decumulation and used a range of tools to help illustrate complex information for customers.
However, the FCA also found some examples where firms were not taking account of the needs of their customers. This included 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.
Most of the advice files the FCA reviewed showed advice provided was suitable. However, in a small number of instances recommendations resulted in consumers losing guarantees or incurring unnecessary charges.
Sarah Pritchard, Executive Director of Markets and International, at the FCA said: “Financial advisers have a vital role in helping consumers to make the right decisions now to support them long into the future. 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.
“Some firms are getting this right and making a real difference to their customers. However, others are 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.”
To help firms the FCA has published a Retirement Income Advice Assessment Tool (RIAAT) and accompanying instructions. This tool shows how we assessed advice files and shows how firms can assess if their advice is compliant with our rules, including the Consumer Duty.
The FCA has also published the Cash Flow Modelling article which will help firms when undertaking modelling.
Giving us her view on this announcement, Rachel Vahey, head of public policy at AJ Bell, said:
“This week marks the tenth anniversary since the announcement of pension freedoms. Since 2015 the advice given on retirement income options has changed considerably. Advisers have been helping their customers navigate complex decisions on how to take an income in their later years, as well as considering if they can – or want to – pass on pension wealth to their families.
“It was natural the FCA would want to dive deeper through a thematic review to explore whether the advice being given met customers’ needs. The industry has been waiting for the FCA’s review of retirement income advice for what feels like a long time.
“The FCA found a mixed bag of results. Some firms are doing well, taking account of the differing needs of their customers. But some are not. The FCA has asked firms to review their processes to make sure they are meeting all requirements.
“The biggest fault the FCA identified is on record keeping. It wants a much clearer picture of how customers’ individual needs are considered when reaching decisions on retirement income. It’s not so much that wrong decisions are made – just the evidence backing them up is missing in the files.
“This serves as a useful reminder for financial advisers for all areas of advice – it’s all about record keeping. And that inadequate records create risks for all aspects of the advice journey and achievement of good customer outcomes. The FCA wants to see evidence the right factors are being considered, and that those customers paying ongoing fees are getting a service back in return.”
Also commenting on the FCA’s review, Stephen Lowe, director at the retirement specialist, Just Group, said:
He said: “Advisers will find today’s thematic review helpful in understanding how the FCA wants firms to modify their approach to meeting the needs of those clients who are focussed on the spending, or decumulation phase.
In a nutshell, clients who are ‘spenders’ need a different approach to those who are ‘savers’. But the devil is in the detail and adjustments to cashflow modelling and risk assessment are highlighted as important areas that need focus.
“Prior work published by the FCA on DB retirement advice improvements has, as expected, been drawn on as an important evidence base to inform the FCA’s new publication.”
Sharing his detailed reaction to the FCA’s announcement, Richard Parkin, Head of Retirement for BNY Mellon Investment Management said:
“Retirement planning is hugely complex even for those with simple needs. It’s vital that we continue to ensure more people have access to high quality, affordable advice. Having clarity over regulatory expectations is an essential requirement to delivering that goal. Indeed, our recent retirement survey revealed 61% of retirement advisers view changing regulation as the biggest business challenge for the next few years.
“Almost ten years to the day since pension freedom was announced, this review provides some thoughtful and practical guidance on how firms can enhance their approach to ensure they continue to deliver great outcomes for clients. There is clearly work to do in some areas, particularly around ensuring that the specific circumstances of retirement clients are recognised, and we look forward to working with clients to develop approaches and solutions that achieve this.
“The risks and opportunities facing clients who are decumulating wealth are different from those accumulating wealth. Effective retirement advice involves recognising this and understanding the linkage between income requirements, risk capacity and investment strategy. Our retirement framework helps advisers think through these issues and what this means for how they structure and manage investment solutions.”
Commenting on assessment of risk and capacity for loss, Parking says: “The FCA found that all firms they reviewed used the same approach to assessing risk across accumulation and decumulation clients. Clients in retirement have multiple, specific goals and this means we can think about risk in the context of achieving these goals rather than just focusing on traditional risk measures such as volatility. The two are connected but are not the same.
“In particular, understanding clients’ capacity to absorb losses versus their appetite for growth is crucial. In many cases, retirement clients will need to focus on balancing risk and return rather than simply maximising return.”
When it comes to understanding client objectives, Parkin points out that “The FCA identified some shortcomings in how firms understand client objectives and income requirements. This follows similar concerns that emerged during the defined benefit transfer review. The advisers I talk to almost universally find this challenging. Getting clients to articulate their income requirements for the next few years is difficult enough. Building a lifetime plan for income is near impossible.
“However, we must start somewhere and having some working assumption for future income is necessary to be able to advise on income today. This is where ongoing retirement advice is so important. Understanding changing income requirements as retirement unfolds and adapting the plan to accommodate these is at the heart of successful retirement planning.”
“On the use of annuities, there was some concern that, with annuity rates looking more attractive, the FCA might put greater emphasis on this product as a universal retirement solution. Instead, they have recognised that guaranteed income is only one element of retirement planning and that its suitability will vary according to client circumstances. We do expect that secure income will have a greater role to play in retirement investment going forward but note that this may not always mean lifetime annuity purchase. Many of today’s retirees already have significant levels of guaranteed income and so will be looking for a more flexible approach for their retirement savings.”
“The need for ongoing advice in retirement, particularly where the client is relying on investments for all or part of their income, is undeniable. It’s great to see that most firms reported that they had delivered ongoing reviews for their clients with less than 3% of reviews having been missed. It’s important though that we recognise that annual reviews shouldn’t always require action to be taken to justify the fee charged. Indeed, in recent years, most clients would have been best advised to sit tight and avoid making knee-jerk reactions to challenging markets. Evidence suggests that, left to our own devices, humans can make poor retirement decisions that result in savings being depleted too quickly, missing out on investment growth, paying too much tax, or even getting scammed. The importance of advice in helping clients avoid making bad decisions cannot be underestimated.”
Dom House, lead consultant at wealth management consultancy firm Simplify Consulting said: “Although based on data before the implementation of Consumer Duty, the release this morning of the FCA’s review of the retirement income advice shows the wider commitment to the delivery of customer outcomes through the Duty. The review highlights that some firms have more to do to take into account the complexity and risks that comes with selecting the right product for the customer, especially during periods of high inflation and challenging market conditions that we have seen over the last two years.
“It also shows that some advice firms have more to do to get the level of information they are gathering and using correct, considering all aspects of an individual’s circumstances, and understanding.
“The expectation for getting the level of personalisation correct is something that advice firms will rightly want to look at in the future. It is telling that decumulation options were not currently in scope of the Simplified Advice Consultation, with the FCA believing it to be too complex for inclusion. Whilst those points are valid, it still creates the potential for poor outcomes for those, potentially with smaller retirement pots, who are not receiving sufficient advice at this crucial point in their lives.
“The findings also shine the light on the importance of not only identification of vulnerable customers, but translating that into the right level, and type of support that they need. In addition, customers need to be offered appropriate ongoing services, and are clear what they are receiving for the charges they’re paying.”
Also commenting on what this review might mean for advice firms, Stuart Ritchie, managing partner of international wealth manager GSB Capital said: “It’s crucial for financial advice firms to take on board the FCA’s call for a thorough review of their processes in light of the findings from the retirement income advice review.
“While it is positive that some firms are prioritising their clients’ needs and designing advice models for positive outcomes, it can be taken that others are falling far short, and potentially jeopardising the financial futures of their clients.
“The highlighted issues such as insufficient risk profiling, inadequate information collection, and failure to deliver periodic reviews demand immediate attention.
“With recent pension reforms introducing greater complexity and risks, ensuring compliance with FCA requirements is vital. Firms must prioritise robust systems and controls, alongside monitoring outcomes to safeguard their clients’ interests.
“Sarah Pritchard’s remarks underscore the vital role financial planners play in securing consumers’ long-term financial well-being. In my opinion, adhering to regulatory standards isn’t just about compliance; it’s about upholding trust and delivering genuine value to our clients, especially at such a critical stage of their lives.”
Kate Rainbow, Head of Key Accounts, Hymans Robertson Investment Services (HRIS), says:
“One of the main things the review highlights is the need for advisers to ensure they have in place a clear advice model that is focused around the needs of their customers.
“We believe that a holistic approach will be key. It will be important to ensure that the investment solutions IFAs use are robust, for example to be able to evidence that they have been stress tested to account for a range of forward looking economic scenarios. Equally, it will be key to demonstrate an evidence and data led approach towards calculating and communicating personalised withdrawal rates, accounting for individual’s specific circumstance rather than relying on averages.
“This, combined with customer focussed communications will put advisers in best position to avoid foreseeable harm, to deliver great outcomes and offer value for money.”
Chet Velani, Managing Director at leading financial software provider EV, comments:
“The FCA’s report is a wake-up call to advisers. It is evident that many firms are failing to take account of the different needs of customers in decumulation versus accumulation and are inadvertently exposing retirees to too much risk. Given that unsuitable retirement income advice has the potential to result in significant harm to consumers, it is crucial that adviser firms effectively understand the retirement needs of their customers and use processes and solutions suitable for the different needs of retirees looking to provide themselves with an income.
“As part of the review, the regulator issued a ‘Dear CEO’ letter requiring all adviser firms to ‘take steps to address the review’s findings’. This letter highlighted urgent work is needed around risk profiling and the approach to determining income withdrawals. Without taking appropriate action, many firms risk not meeting the requirements of the Consumer Duty. The report supports our long-held view that a comprehensive risk suitability process specifically for decumulation is required, using a different methodology for accumulation.
“Those drawing on their pension wealth to provide an income have very different needs and face different risks than those in the wealth accumulation phase. While no one wants poor investment performance, those building their wealth have time for investments to recover, could save more or work longer. However, for those already in retirement and living on the income from their investments, an extended period of poor returns, particularly early on, can be catastrophic. If income begins to run out in later retirement, there may be little that can be done about it beyond living in very reduced circumstances.
“The FCA’s report reinforces the existing Consumer Duty emphasis on the ongoing monitoring of client investments to ensure suitability and avoid foreseeable harms. This is of paramount importance for clients using drawdown. There needs to be regular reviews, the investment strategy must be fully aligned with the individual’s long-term income needs, and the specific decumulation risks, like longevity, inflation, and sequencing risk, must be front of mind.
“To help advisers assess the sustainability of drawdown for their retiree clients, we have created a measure of income risk: Income at Risk (IaR). Put simply, this measures the downside risk to clients’ sustainable income and can be used to select funds that match their clients’ attitude to income risk in a way familiar to advisers advising on accumulation.
Many of the FCA’s findings tally with EV’s white paper, published In early 2021, Drawdown: The Mirror Image of Accumulation. This shows that most current drawdown solutions are exposing retirees to too much risk, and urgent action is needed to protect them from running out of money too soon. To find out more, download EV’s 2021 white paper from its website: https://info.ev.uk/drawdown-whitepaper.
