Some rumblings but little thunder – the FCA's Thematic Review of retirement income advice
The FCA has published the long-awaited result of its Thematic Review into retirement income advice. Predictably, this highlights some areas for improvement but (dare we say) the overall tone is perhaps positive.
The FCA notes that the thematic review takes place against the backdrop of an ageing population and a growing retirement income market - the final salary/defined benefit market's value still exceeds the defined contribution/money purchase market, at £2.17 trillion as opposed to £1.41 trillion but the advent of auto-enrolment means the gap will continue to close, with 79% of employees now part of a workplace pension scheme. There is therefore considerable scope for financial harm if advice on the decumulation phase of a pension is unsuitable, particularly as fewer and fewer retirees will have access to secure income via a final salary/defined benefit scheme as time moves on.
The FCA also notes that retirees face more complex choices now. Gone are the days when you would/had to simply purchase an annuity (the FCA notes that only 10% of pensions accessed for the first time in 2021/22 were used to purchase an annuity, as opposed to 90% prior to pension freedoms). Now, questions need to be asked around what sort of investments to hold (and changes to those as investors get older and their needs change), the level of income to be taken and the member's needs and objectives for what could be an extended period in retirement. If the advice given at the outset is unsuitable, it significantly increases the risk of the member running out of money.
It therefore makes sense that the key concern raised by the FCA is the risk of retirees running out of money in retirement, along with investors paying higher charges than necessary and being exposed to complex solutions that do not match their risk profile. Such concerns are enhanced for retirees, who may be unable to return to work to make up for any losses suffered.
The FCA's findings note that some firms had adapted well to the post pension-freedoms landscape, with training provided on decumulation and services designed to meet the needs of customers moving to this phase. It's also positive that 67% of the sample files the FCA reviewed were found to be suitable, with only 11% having concerns identified around suitability and a further 22% with material information gaps. Obviously the FCA would have liked the percentage of suitable files to be higher, but this is arguably not a "bad" result, and certainly compares well with the FCA's suitability findings on final salary/defined benefit transfers, for example.
Predictably though, the FCA noted some areas for improvement:
- Firms could consider the sustainability of income withdrawal more effectively, either by implementing cashflow modelling (if not already being used) or using it more consistently. Any such modelling does of course need to be tailored to the member's circumstances.
- It was noted that some firms were not adequately assessing capacity for loss and attitude to risk, which could lead to inappropriate solutions being recommended.
- Some files showed a failure to obtain information, such as expenditure analysis, financial circumstances of the member, income needs or anticipated future lifestyle changes.
- Firms were also reminded of the need to confirm the details of ongoing services to be provided (and to provide those services where members were paying for such a service).
Furthermore, whilst the files reviewed pre-dated the implementation of the Consumer Duty, the FCA did consider how firms were looking to comply with the Consumer Duty. Worryingly, just over half of the firms subject to the desk-based advice review had not defined their target market or shown that their products met their customers' needs – Consumer Duty requirements.
The review also heralds the publication of the Retirement Income Advice Assessment Tool (or RIAAT). This is an online resource developed by the FCA and (somewhat predictably given the name) this allows firms to review the suitability of retirement income advice. Fans of the DBAAT are in for a treat, as on first blush, this seems to be very similar in that it is an online spreadsheet with several tabs covering information collection and suitability. Excitingly, there is a whole tab dedicated to the Consumer Duty.
The FCA noted that firms subject to the desk-based review will receive specific feedback and that they are considering options for how to address poor practice. They also note that retirement income will remain a key focus but, encouragingly, there is no mention of the use of either s.166 or s.404 of FSMA!
At the same time, the FCA has published a Dear CEO letter highlighting the important role advisors play in helping customers make difficult choices on retirement. This reminds firms of the need to ensure that advice processes meet the FCA's requirements and reiterates the areas for improvement highlighted in the Thematic Review.
Firms are asked to address the review's findings internally and are pointed towards the RIAAT and an FCA article on cashflow modelling.
Overall, the mood is fairly positive – the FCA notes several areas for improvement (and there is some concern around implementation of the Consumer Duty) but there is not too much thunder here; more a light rumble than a full-blown storm. We do not doubt that this is but the first engagement rather than the end of the FCA's focus on this area, but, given the relatively high levels of suitability identified by the sample review, perhaps the FCA's focus will be on other areas (such as vehicle finance) in the short term.