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The FCA has published the long-awaited findings from its thematic work on retirement income advice. The review identified a number of concerns within the firms it assessed: only two thirds of the advice files were suitable and there were significant flaws across key aspects of firms’ advice processes.
The FCA has urged financial adviser firms to review their processes against the findings and has threatened action for those who fail to act where needed. It also committed to further supervisory work exploring the scale of the issues identified by the review and tackling any potential harm.
The findings report is accompanied by a series of additional publications from the regulator:
- Dear CEO letter: A letter has been sent to the chief executives of financial advice firms asking them to review and, if necessary, update the processes they use to deliver retirement income advice.
- Cash-flow modelling report: Key findings on the way firms are using cashflow modelling to demonstrate suitability have been published. These have been drawn from across the FCA’s supervisory work on retirement income and defined benefit pension transfer advice.
- File review methodology: The FCA has published the file review tool it uses to assess retirement income advice (known as the ‘RIAAT’). This has a dual function: to help the sector understand the regulator’s approach to assessing suitability and provide a resource for firms to use to review their advice files. This is in line with the regulator’s approach to defined benefit pension transfer advice.
Key findings from the review
After carrying out a survey on around a thousand firms, the FCA undertook detailed assessments of twenty-four firms’ centralised retirement propositions and advice files. Based on this, it identified a number of areas where firms aren’t meeting expectations and improvement are needed.
| Focus area | Key findings |
| Centralised retirement proposition | Some firms hadn’t adapted their advice model to meet the needs of clients in retirement. This included the scope of their initial / ongoing advisory services, adviser charging model and investment range. There were also weaknesses in some firms’ processes for fact-finding, risk profiling and income withdrawal. |
| Advice suitability | Firms were not consistently gathering the information needed to deliver suitable advice. Key fact-finding deficiencies included:
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| Risk profiling | The language and questions within some firms’ risk profiling approaches had not been tailored to clients in decumulation. These accumulation-focused tools risked clients’ attitude to income security not being assessed. And some firms either failed to assess capacity for loss or didn’t assess it robustly. |
| Income withdrawal strategy | Not all firms were effectively considering the sustainability of income withdrawal, with approaches to cashflow modelling having a number of limitations. This included basing it on data that didn’t reflect clients’ circumstances and using assumptions that could not be justified. |
| Periodic suitability reviews | Firms didn’t always document whether they were delivering an ongoing service and what that service included. Certain firms were also charging clients for ongoing services that weren’t delivered as promised. |
Steps you should take
If you’re a financial adviser, we recommend you undertake the following four steps:
- Undertake a gap analysis between your advice processes and the review’s key findings: This should focus on the design of your centralised retirement proposition and include your approach to fact-finding, risk-profiling, cashflow modelling, income withdrawal, and ongoing service delivery. If any significant issues are identified, consider whether you need to carry out further work (such as a sample file review) to assess the potential impact on clients.
- Review your approach to cashflow modelling: Cashflow modelling is a key tool in demonstrating the suitability of your advice. But this relies on you making sure client input data is accurate, your assumptions on areas like investment returns, tax, charges and life expectancy are justifiable, and the outputs are communicated so that clients can make an informed investment decision.
- Check your file review tool against the RIAAT: File reviews can only provide an effective mitigant against poor advice where the approach covers the key regulatory requirements and they are carried out robustly. The publication of the FCA’s file review tool allows you to assess whether your internal approach passes regulatory muster.
- Document the work you have done: Further supervisory work is planned on firms in the retirement income advice market. This will also include how firms are ensuring their approach meets the Consumer Duty. It’s therefore important to document the work you take in response to the review, including ensuring it’s subject to appropriate senior management scrutiny.
Considerations for other firms
While the review focused on financial advice, we also think it’s important that other firms in the retail investment sector consider the implications for their own businesses. This includes investment platforms (D2C and B2B2C), pension providers and wealth managers, as well as the third-party service and technology providers who support them.
How we can help
Our team of experts has significant insight into the FCA’s approach to this topic and we have already supported a number of clients in this area.
We can help you determine how the review findings affect your business and ensure your approach to retirement income advice is in line with the regulator’s suitability and Consumer Duty requirements.
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