The Financial Conduct Authority has written to chief executives of financial advice firms highlighting where retirement income advice needs improvement.
The ‘Dear CEO’ letter follows the FCA’s thematic review of retirement income advice, which identified some examples of firms not taking account of the needs of their customers. This included where firms operated “in a way unlikely to lead to good customer outcomes”, the Watchdog said, by not considering a sustainable level of income to support retirement.
The review also found instances of firms not providing the right information to customers.
While most of the advice files the FCA reviewed showed advice provided was suitable, in a small number of cases, recommendations resulted in consumers losing guarantees or incurring unnecessary charges.
Sarah Pritchard, executive director of markets and international at the FCA, said: “Decisions for consumers approaching retirement are complex, with the potential for risk. We want to support a sector that can help consumers access pension benefits, invest with confidence and have a sustainable income when they retire.
“Some firms are getting this right and making a real difference to their customers. However, others are not even getting the basics right and putting their customers’ futures at risk. We urge all firms to take on board our findings and review their own processes. Where they do not, we will act.”
The FCA identified several areas for improvement, including the approach to determining income withdrawals, which was applied without taking account of individual circumstances, or based on methods or assumptions that were not justified and recorded.
Firms must also look at risk profiling, the regulator said, which in some instances was not evidenced or was inconsistent with objectives and customer knowledge and experience and lacked consideration of capacity for loss.
The FCA also identified weaknesses in the ability of firms to gather necessary information about customers to demonstrate advice suitability, including expenditure or other financial provision, or not exploring future objectives or circumstances, including income needs or lifestyle changes.
Chet Velani, managing director of EV, said: “Those drawing on their pension wealth to provide an income have very different needs and face different risks than those in the wealth accumulation phase.
“While no one wants poor investment performance, those building their wealth have time for investments to recover, could save more or work longer. However, for those already in retirement and living on the income from their investments, an extended period of poor returns, particularly early on, can be catastrophic. If income begins to run out in later retirement, there may be little that can be done about it beyond living in very reduced circumstances.
“The FCA’s report reinforces the existing Consumer Duty emphasis on the ongoing monitoring of client investments to ensure suitability and avoid foreseeable harms. This is of paramount importance for clients using drawdown. There needs to be regular reviews, the investment strategy must be fully aligned with the individual’s long-term income needs, and the specific decumulation risks, like longevity, inflation, and sequencing risk, must be front of mind.”
The FCA’s letter also revealed that a periodic review of suitability, where relevant, was not always delivered to customers that had paid for ongoing advice and some firms held inaccurate or insufficient records to enable customer outcomes to be assessed and track whether periodic review services were delivered.
Steven Cameron, pensions director at Aegon, said: “All firms active in this important market will need to devote considerable time to reflect on the FCA findings.
“One recurring theme, very much at the heart of the Consumer Duty, is that it’s not good enough to be delivering good outcomes – firms need to be able to evidence this in their client information gathering, advice files, due diligence records and management information.
“Ideally all those approaching retirement would receive holistic financial advice, tailored to their individual circumstances, objectives, investment risk profile and capacity for loss. Delivering this in all its complexity has huge value but clearly comes at a high cost, meaning only a minority will access it. The thematic review emphasises just how important the Advice Guidance Boundary Review is to ‘at and in retirement’ clients, and why all efforts should be made to deliver both targeted support and simplified advice in this market.”
Rachel Vahey, head of public policy at AJ Bell, said firms will need to provide the FCA with a much clearer picture of how customers’ individual needs are considered when reaching decisions on retirement income.
Vahey said: “It’s not so much that wrong decisions are made, just the evidence backing them up is missing in the files.
“This serves as a useful reminder for financial advisers for all areas of advice, it’s all about record keeping. And that inadequate records create risks for all aspects of the advice journey and achievement of good customer outcomes. The FCA wants to see evidence the right factors are being considered, and that those customers paying ongoing fees are getting a service back in return.”
Kate Rainbow, head of key accounts at Hymans Robertson Investment Services says a holistic approach will be key.
Rainbow said: “It will be important to ensure that the investment solutions advisers use are robust, for example to be able to evidence that they have been stress tested to account for a range of forward looking economic scenarios. Equally, it will be key to demonstrate an evidence and data led approach towards calculating and communicating personalised withdrawal rates, accounting for an individual’s specific circumstance rather than relying on averages.
“This, combined with customer focussed communications will put advisers in the best position to avoid foreseeable harm, to deliver great outcomes and offer value for money.”
