Richard Cooper, business development manager at The London Institute of Banking & Finance (LIBF) looks at the impact made by the FCA’s thematic review of retirement income advice and how it intersects with the demands of Consumer Duty.
The FCA’s thematic review of retirement income advice was published in March 2024 and quickly made an impact. We have started to see a shift toward ensuring that good client outcomes are achieved at retirement and that this can be evidenced going forward.
The FCA undertook the review because “decisions for consumers approaching or in retirement have become more complex with the potential for more risk” and bad advice on how to manage retirement savings can “have a particularly detrimental impact on consumers”. In particular, the regulator wanted to find out whether advice models focused on the needs of consumers in the decumulation phase.
It turns out that the answer depends on who you ask. In June 2023, the FCA sent out an initial survey to 1,275 adviser firms, with 87 questions, looking for input on a wide range of areas including adviser remuneration, vulnerable customers and target markets as well as relevant data and management information requests. A total of 977 firms responded. In addition, the FCA picked 24 firms to submit client files, which were reviewed against a matrix.
Overall, the FCA found a ‘mixed picture’ on retirement income advice. It didn’t identify any systemic issues or any widespread problems. However, there were pockets where adviser firms were falling short of FCA expectations. Examples included record keeping, risk profiling and capacity for loss. The FCA published a ‘Dear CEO’ letter plainly outlining which areas it was concerned about.
Decumulation is different from accumulation
One of FCA’s key points is that firms must recognise that decumulation is different from accumulation and adjust the advice process to mirror that. That might sound obvious but, of the firms surveyed, only 221 (of 977) had a different process for establishing attitude to risk and capacity for loss in the decumulation phase.
What does the FCA’s thematic review say about risk profiling in accumulation and decumulation?
The review says:
“Although, generally, the example questionnaires we saw were clear, with unambiguous questions and descriptions, some were written with an accumulation specific focus. This means customers could be inaccurately profiled and take on risk not in line with their circumstances. In a small number of examples firms had recognised that an accumulation-specific risk profiling approach had limitations and supplemented this with a more detailed discussion about retirement income needs and the need for secure income.”
It also says:
“From the CRP reviews, we saw that for all 24 firms the risk profiling approach showed no clear distinction between accumulation or decumulation. This meant the language and questions were not specifically framed for customers in decumulation.”
What can be done differently?
The end solution for the client should reflect their needs, objectives, risk profile, and expenses in decumulation. The process for finding that solution is not the same as it is during accumulation. Any risk profiling process that fails to account for the swing from net saving to net spending will be failing to properly account for investors changing circumstances.
You need to have the full picture to be able to advise and recommend accordingly, summarising the changes in a suitability report. You should make sure that you can demonstrate that you have taken an approach that is suitable for the decumulation phase.
The different approach doesn’t necessarily mean you need to have separate risk profiling systems or questionnaires although there may be certain advantages in doing so.
If the risk profiling tools are the same for both accumulation and decumulation, then providing specific evidence in a suitability report of additional discussions, questions and analysis should be considered.
Do you need to change?
In a nutshell: yes. That’s especially the case if there is no discernable difference between your accumulation and decumulation processes. The FCA is expecting firms to put in the work to set up a robust and complete advice process.
An investor’s risk profile will likely change on retirement, quite possibly dramatically. How they see the world is changing, so their advice needs will likely change too.
Good risk analysis will look at the changes in their financial circumstances and their goals and objectives, not just their risk profile.
Consumer Duty in an ageing society
The FCA goes to great lengths point out that the review of retirement income advice is not a one-off exercise. So, even if you feel you are in good shape now, you should bear in mind that the FCA wants to see ongoing “good outcomes” for consumers, in line with the Consumer Duty regulations. What this looks like in a decumulation phase is a moving target.
That means frameworks will have to be much more flexible. The governance framework must be set up to collect data that enables the analysis of consumer outcomes. It also has to support monitoring those outcomes and then, armed with that information, regularly review and (if necessary) change processes.
In an ageing society, Consumer Duty is going to put the spotlight on decumulation advice. The time to face the challenges that will bring is now.
