The FCA has recently circulated a Dear CEO letter based on its thematic review of the retirement income advice market, the results of which have been published in TR24/1 Thematic Review of Retirement Income Advice. The FCA has conducted the review, with the aim to assess the quality of advice provided to consumers facing complex pension decisions. The review has revealed both good and poor practices across the market, while emphasising the critical role that firms have in ensuring they provide suitable advice to their customers.
The FCA’s findings
Through the 2015 pension reforms, flexibility in accessing defined contribution pensions was increased, leading to more complicated decision-making processes for consumers. Some firms were found to have demonstrated a strong consideration for customer needs and focused on improving their advice models in order to result in positive outcomes. However, areas of improvement were also identified, indicating potential risks of poor outcomes for consumers. These include:
- Determining income withdrawals – individual circumstances were not considered and a breakdown of the thinking process was not recorded;
- Risk profiling – not evidenced, inconsistent with the clients’ objectives, knowledge and experience, or lacking consideration of capacity for loss;
- Information collection – failure to collect the necessary information, such as expenditure and future income needs, to demonstrate advice suitability;
- Periodic review of suitability – not always provided, even where clients have paid for on-going advice;
- Recordkeeping – inaccurate or insufficient records maintained, which impacts firms’ ability to assess customer outcomes and track whether periodic review services were delivered.
The FCA emphasised the importance of complying with regulatory requirements, including the Consumer Duty, highlighting the importance to act in the best interests of retail clients and supporting them in achieving their financial objectives.
Next steps for firms
Firms are urged by the FCA to address its findings, to enhance their processes and monitor customer outcomes effectively, in order to deliver positive outcomes to their clients. In particular, Firms should consider the questions asked by the FCA in the data survey to ensure that their own management information is appropriate for their business.
Additionally, the Retirement Income Advice Assessment Tool (RIAAT) was also introduced, alongside accompanying instructions, to assist firms in assessing the suitability of advice, further aiding in compliance with the FCA standards. This tool is not mandatory but is recommended by the FCA.,
Whilst firms are not compelled to use this tool, the FCA has previously introduced tools such as the Defined Benefit Advice Assessment Tool (DBAAT) on a non-mandatory basis, but which have subsequently become expected. There is no indication that this will be the case here, but it would be prudent to assume that it will, especially as the FCA expects the tool to be used to assess past advice, such as when reviewing complaints. Therefore, we would encourage firms to utilise the new RIAAT tool as soon as practicable.
The FCA has also published an article that seeks to help firms improve the way they use Cashflow modelling. It outlines points to consider when undertaking modelling to help firms deliver suitable advice and aid consumer understanding.
Looking ahead, the FCA reiterated its commitment to ongoing supervision in the retirement income advice market to address identified issues and mitigate potential harms. Firms should engage with the FCA, seek guidance on compliance matters, and proactively improve their practices to support their clients in navigating retirement income decisions adhering to the highest standards.
Firms should consider testing their back book of retirement income business to ensure that it can pass the regulatory test in addition to ensuring that current and future standards satisfy the regulator.
How can Complyport help?
With over 22 years of experience supporting client in financial services including the financial planning sector, Complyport’s highly skilled team of consultants assist firms:
- Identifying where improvements in their procedures can be made
- Ensuring current practices meet regulatory expectations
- Advising on conducting past business reviews to determine if previous activities met the necessary standards
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