Before the end of the year, the FCA is likely to publish its initial findings following its thematic review into retirement income advice.
Since the review was announced at the start of 2023 after a pandemic-induced delay, the regulator has sent a series of wide-ranging questions to a large sample group of adviser firms. The questions cover topics from how firms give retirement income advice to how this impacts their business models, and from staff remuneration to training and competency. So, everything, including the kitchen sink. No subject is off-limits it seems.
The line of questioning is detailed to say the least and in parts, intriguing. But perhaps it’s not surprising. The approach is entirely consistent with the FCA’s intent to shift its focus to be more of a data-driven body. Its extensive data-gathering on every aspect of adviser firms’ delivery of retirement income advice is the start for how the regulator plans to now operate.
Once the data is in, I expect the FCA will carry out a deep dive into it to look for emergent themes for further investigation. These themes may be covered in its initial findings. Although we don’t know what the regulator will determine from its analysis, we do know that delivering retirement income advice is a complex area and there’s no shortage of demand for it.
For me, the most important finding the FCA needs to uncover, and address is the volume of work advisers face to deliver retirement income advice which is caused by existing regulatory processes.
With the ever-growing advice gap, the industry needs regulatory advice processes to be simplified to support more consumers, rather than the FCA layering more onto firms.
Why now for the regulator’s thematic review?
It’s not a coincidence that the FCA is carrying out a thematic review of retirement income advice at a time when inflation is rocketing, consumers are experiencing a cost-of-living crisis – and when annuity rates are improving. With the macro-economic environment changing substantially, It’s a challenging time for the industry. However, the Consumer Duty offers advisers a useful guide in terms of dealing with the issues.
Firms have a regulatory responsibility to consider foreseeable harms to their clients and check that products and services are still suitable and effective. As part of this, they should look to go through a formal process to examine, among others, their retirement income advice processes, both at point of new sale and at review to determine if there should be changes. Although firms aren’t required to update processes, it’s important they consider if they need to change and document the outcomes of any review.
While investment markets are shifting, the core issue around retirement advice hasn’t changed – clients’ need to weigh up a suitable mix of sustainable income to last the rest of their lives and a flexible income to cope with changing circumstances.
Advisers have a tried-and-tested template in place for what ‘good’ looks like with the regulator’s previous guidance on Defined Benefit transfer advice. When documenting the impact of the economic climate on processes, they could also, among other areas, consider if:
income can or should be adjusted for existing clients in flexible retirement income solutions to cope with higher inflation / change in economic outlook?
investment portfolios need to be changed?
the change in interest rates and inflation mean an annuity (flat or inflation-linked) is more attractive, and if so, when should this solution be considered?
The boundary between advice and guidance
With the FCA’s thematic review into retirement advice ongoing, it’s important to look back over the past eight years in particular and consider the impact of pension freedoms on the industry. The regulation allows consumers the flexibility to best fit their savings to their needs - but it’s complicated and the need for help is high with demand increasing all the time. Advisers have risen to the challenge but as they continue to deliver effective retirement income advice to existing clients, the issue they wrestle with is capacity.
The process can be too complicated, over-long and costly to deliver advice to everyone who wants it. To deliver good outcomes for the clients they do have, advisers are obliged to explore every aspect of clients’ needs and review these regularly.
The government and the FCA of course recognise the capacity problem, It’s one of the reason why, in addition to its work on retirement income advice, the regulator and Treasury have jointly announced a wholesale review of the advice / guidance boundary. This is an important step towards the industry being able to service more clients.
The FCA has recently demonstrated its willingness to listen to feedback and to take it seriously. Over the past few months, the industry has fed back that the body’s proposals for simplified advice on ISAs (CP22/24) was unviable. The FCA has since postponed it and has committed to take the feedback on board in the wider advice / guidance boundary review, including ensuring that proposals are commercially workable.
I’d encourage all adviser firms that receive a request from the FCA for information on their retirement income advice processes to use it as an opportunity to explain the:
- obstacles that prevent them from servicing more clients with straightforward needs, in a simpler way
potential solutions that would allow them to offer a form of simplified advice that could be delivered more cost effectively.
Good outcomes at retirement for more consumers
The’s FCA’s initial findings from this thematic review may hopefully lead to it adapting the regulatory framework to streamline advice, to create capacity within adviser firms and to help more consumers.
This is where the most urgent need for change is.
The thematic review may also prove to be an important milestone to a more accessible advice regime – and the start of a two-way discussion around a simplified, cost-effective form of retirement advice readily available to more consumers.
More immediately, the Consumer Duty rules can guide firms now if advice processes need to be reviewed as a result of the economic climate – consider the impact on clients and document conclusions and changes if appropriate – to continue to ensure good outcomes.
The value of investments can go down as well as up and your clients could get back less than they paid in
The views expressed in this blog should not be regarded as financial advice.