It’s now ten years since George Osborne stood up in the House of Commons to announce nobody would ever need to buy an annuity again, and nine years since pension freedoms were implemented.
Pension freedoms certainly brought about a sea change. Pension savers have a great deal of flexibility when taking income from their pensions to match their objectives. But that means choices, and therefore some problematic decisions to make.
Getting regulated advice to navigate this maze makes sense for many people. The FCA has long since let the industry know it wanted to have a closer look at the area of retirement income advice, and last year conducted the research as part of a thematic review. The FCA finally published its results in March.
Below I run through the main themes emerging from the FCA’s thematic review, and how they reflect their key findings.
The Thematic Review
The FCA conducted the research in the first half of 2023.
It had three main aims. It wanted to:
- get an insight into how the retirement income market is working;
- understand if firms’ advice models consider the specific needs of consumers in decumulation; and
- consider whether consumers were getting suitable retirement income advice.
All this will inform their future areas of work.
The review was in two parts.
First, in June last year the FCA sent out an initial survey to 1,275 adviser firms. This wasn’t a small request – there were 87 questions, looking for input on a wide range of areas including adviser remuneration, vulnerable customers and target markets as well as relevant data and MI requests. 977 firms responded. Their answers make up a portion of the results of the review.
The other information was collected from 24 firms picked by the FCA to submit client files into the review.
The FCA’s overall verdict was that retirement income advice was a ‘mixed picture’. There weren’t any systemic issues, no widespread problems. And some firms had adopted a specific decumulation approach. But there were pockets where adviser firms were falling short of FCA expectations, for example, around record keeping.
Alongside the results of the review, the FCA published a CEO letter plainly outlining which areas it was concerned about. This direct summary – together with the meaty report, including examples of good and bad practices – should help adviser firms review their approach and check it’s in line with FCA expectations.
Six main themes
The thematic review is comprehensive, covering a wide range of areas from centralised retirement proposition (CRP), including the role cash flow modelling (CFM) and risk profiling could play, to advice suitability.
When you read the details there are six different themes that reappear in each section.
1. A consistent framework
Throughout the report the FCA mentions the benefits of the adviser firm developing a consistent framework for giving retirement income advice.
Whether they develop a CRP or not, the FCA is looking for adviser firms to design an approach that sets out clear parameters for their advisers to follow, together with full guidance on how to use it. Within that framework, firms must allow some flexibility so that the advice can be tailored to the customer’s needs.
The FCA wants to see an approach that delivers consistent consumer outcomes. For example, if the same client approached two different advisers in the same firm, then they would receive the same advice.
Setting this consistent framework is important in several different areas. For example, the FCA references it when discussing what CFM and sustainable income tools the firm should use. It uses an example of good practice where a firm sets out the main CFM and sustainable income tools to use, along with their key features, and guidance on assumptions to use. The adviser is then free to use the most appropriate of these when giving advice.
It also mentions it in connection with risk profiling and developing a robust governance structure.
2. Record key evidence
The FCA is firm that good record keeping is crucial throughout the retirement income advice process. This is an area where FCA has pulled up adviser firms before, but there is still not enough consistency on this front.
It expects firms’ fact finding to be complete with no gaps, inconsistences or missing relevant information. Firms may well consider or discuss wider aspects with clients – such as range of annuity solutions – but FCA is looking for firms to record this sort of detail to back up the advice given.
This goes wider than fact finds. The FCA is looking for other key information – for example due diligence of income sustainability tools, what assumptions should be used, and the governance framework surrounding the setting of the advice process.
3. Decumulation is different from accumulation
One of FCA’s key points is that firms must recognise that decumulation is different from accumulation, and firms must adjust the advice process to mirror that.
Not only should the end solution reflect the customer’s needs, objectives, risk profile, and expenses in decumulation, the process for getting to that conclusion also means taking a different approach.
For example, only 221 firms (out of 977) had a different decumulation process for establishing attitude to risk (ATR). However, the FCA is keen to point out that when moving from accumulation to decumulation it is likely the ATR and capacity for loss (CFL) for many customers will change. When it looked at the 24 firms’ advice files in depth it saw there was no clear distinction between accumulation or decumulation for risk profiling. This worried the FCA – the language and questions were not framed specifically for decumulation, and raised the concern that customers could be inaccurately profiled and take on risk not in line with their circumstances.
Firms could take a different approach. For example, one firm included a supplementary decumulation questionnaire and discussion on retirement objectives and income needs.
4. Data data data
The FCA wants adviser firms to adopt a robust governance approach and that includes solid collection and retrieval of management information (MI). There are several areas in the report where the FCA pointed to this lacking.
For example, in both elements of the research – the data survey as well as the advice register completed by the selected 24 firms – some firms found it difficult to provide the requested data. This was because the information was not measured, not centrally recorded, had to be collated from different sources or systems, or could only be provided through manual extraction from individual files, which needed considerable time and effort to collate.
It feels like we have been here before, with this FCA complaint. It looks likely the FCA will follow up this thematic review with another asking for similar information, so firms may want to review their MI to establish whether they can retrieve the data if asked for it.
5. Review often
The FCA is expecting firms to put in the work and effort to set a robust complete advice process. But it is at pains to point out that this is not a one-off.
Instead, the governance framework must build in the collecting of data to support establishing consumer outcomes, monitoring them, and then, armed with that information, regularly reviewing and (if necessary) changing processes.
This will sound very familiar; it is a clear requirement of the Consumer Duty.
6. FCA’s overall framework
Finally, the Retirement Income Advice Review is not being carried out in a vacuum. The FCA sees it tying into other areas of its focus and work.
The most obvious is Consumer Duty. The timing of the review gave the FCA an opportunity to explore how firms were implementing the Duty.
It is looking for clear evidence that firms are meeting the Duty in this area. It wants to see firms specifying their target market and designing the service to meet the needs and objectives of that market, as well as addressing the risks it faces.
Firms must ensure their communications are likely to be understood by customers, which may mean testing and monitoring them. The FCA will also be looking for evidence firms have met the consumer support outcome, as well as cross cutting rules.
Given the age of the target market, a robust vulnerable customer policy is another essential. The good news is all the 24 firms in the desk review had a vulnerable customer policy. But the bad news was not all were actively collecting the data, monitoring the outcomes, and reviewing the policy. This is a case where too many had adopted the approach of ‘set and forget’.
What’s next?
The FCA’s thematic review covers a lot of ground in good detail.
The FCA is not being vague; together with its CEO letter it is easy to see what areas it wants firms to review.
It’s worth adviser firms reading the report and taking the opportunity to review their own practices. There may be changes or improvements that can be made, and the examples in the report of good practice could help with setting any new direction.
Any work firms carry out should be set in the context of Consumer Duty and the FCA’s expectations and requirements in this area.
Finally, this isn’t the last we’ll hear about retirement income advice. The FCA makes it clear that this will be a continuing area of focus and further work.
