In 2020, the ‘Assessing Suitability Review 2’ was halted by the FCA in response to the Covid-19 Pandemic, but given pension freedoms, the cost-of-living crisis, and the suitability issues surrounding British Steel defined benefit pension transfers, it was always likely that the FCA would re-prioritise a review surrounding retirement income advice. It came as no surprise when in January 2023, the FCA announced its Thematic review of retirement income advice as ‘a piece of discovery work to explore how financial adviser firms are delivering retirement income advice and assess the quality of outcomes consumers are getting.’
In June 2023, the FCA sent out an initial survey to 1275 adviser firms containing 87 questions, focusing on a wide range of information, including, but not limited to: fees, adviser remuneration, vulnerable clients, numbers of clients in decumulation and target market, alongside relevant data, MI, and internal controls information. Firms had three weeks in which to respond to the survey, of which 977 firms responded, and 24 firms were selected to submit client files to the FCA.
Today (20th March 2024), the FCA published its findings of TR24/1, with the FCA also writing to the CEOs of firms asking them to make improvements to their processes. It is important that firms note that the findings of the report go into greater detail than the content of the Dear CEO Letter, therefore firms should pay attention to the full content of the review to ensure they provide good consumer outcomes.
Whilst the FCA found some examples of good practice, where the advice and services delivered were clearly designed to meet the needs of customers in decumulation, it also saw some examples of poor practice, where some firms had not adequately considered the needs of their customers or set out their advice model in a way which would likely lead to good and consistent outcomes. We examine those findings below.
Key Findings
Income Withdrawals: In some instances, the approach to determining income withdrawals was applied without taking account of individual circumstances, or based on methods and assumptions that were not justified or recorded. Not all firms were effectively considering the sustainability of income withdrawal. For example, many firms were not using Cash Flow Modelling (CFM) or were not using it in a consistent or appropriate manner. The lack of, or inconsistent, use of CFM or a withdrawal guide rate (where CFM is not used) to estimate sustainable levels of income means consumers risk making poor decisions about how and when to withdraw their funds.
Risk Profiling: In some files, risk profiling was not evidenced, was inconsistent with objectives and customer knowledge and experience, or lacked consideration of capacity for loss (CFL). In relation to CFL, some firms were not assessing CFL for customers. Failure to consider CFL in decumulation means firms may not be correctly identifying suitable income or investment-based solutions. This could lead to customers taking on more risk than appropriate and enduring reductions to their income that they cannot withstand.
Advice Suitability: The FCA had particular concerns about the suitability of the advice given in seven files. The issues identified included; loss of guarantees and features, penalties incurred, and unnecessary charges or taxes. Some customers were also not given information about relevant options.
There was a failure by some firms to get necessary information about customers to demonstrate advice suitability, including expenditure or other financial provisions, or not exploring future objectives or circumstances, including income needs or lifestyle changes. The FCA identified the following deficiencies with firms’ fact-finding and records:
- the potential vulnerability was not identified, recorded, or explored even where information on file suggested vulnerability may have been present.
- knowledge and experience of investments and understanding of risk were either recorded at a high level, inconsistently or not supported by the information on file.
- expenditure analysis was not recorded or completed so it was not clear what the minimum income need was or what proportion of this was for essential (non-discretionary) expenditure.
- information about wider financial circumstances, for example, other pension provisions and the state pension was missing.
- income, including any lump sum capital needs, were not quantified or the timeframe for which income was required was not stated.
- future lifestyle changes were not explored or recorded, for example, when a partner would retire/receive a pension or how objectives or income needs were likely to change.
- it was unclear whether information relating to the risk of capital erosion, the potential for annuity rates to be worse in future or that income levels might not be sustainable had been disclosed.
Periodic review of suitability: For some firms, ongoing service was not always delivered to customers who had paid for it. (This is particularly relevant given what is happening with regard to complaints occurring within the sector currently.)
In response to this section in the data survey, 231 firms were able to indicate that 6,108 out of 213,128 customers (2.9%) had paid for but did not receive an annual/ongoing review in 2022. The remaining firms were unable to provide the number of missed reviews but proceeded to indicate why reviews had been missed. The key reasons were (more than one option might apply for each firm):
- 382 firms indicated customers declined/did not respond.
- 29 firms attributed this to firm error/oversight.
- 10 firms indicated this was due to employee resource.
- 157 firms noted that data was either not measured or not recorded centrally.
The FCA is clear that it expects firms to track and monitor when review meetings are due and identify whether any are missed. Where firms do not measure key information or are not able to access this easily, they may find it more difficult to demonstrate the delivery of good customer outcomes.
Control Framework: Some firms held inaccurate or insufficient records to enable customer outcomes to be assessed and track whether periodic review services were delivered.
From the advice registers the FCA received, it identified inaccurate or inadequate management information (MI) for over half of the firms. In several instances, it found advice registers were so inaccurate that the advice scenario for the files received did not match what was recorded on file.
The concerns noted with advice registers were:
- the recommended solutions were not recorded which made it difficult to identify transactions that might pose a higher risk of customer detriment.
- the ceding scheme arrangements were not shown so the arrangement the customer had held before the retirement income advice was given was unknown.
- the ceding scheme provider names were missing so it was not possible to identify plans that might have held underlying guarantees or safeguarded benefits.
- where ceding scheme provider names were recorded, any ceding plan features such as underlying guarantees or safeguarded benefits were not always noted.
- the type of advice, initial or ongoing, was not always recorded which made it difficult to select files according to the type of advice given.
- the level of initial and ongoing advice fees was not always shown.
- it was unclear whether the files had been quality assurance (QA) checked.
Vulnerable Customers: The FCA findings show that while firms have thought about the needs of vulnerable customers, they were not implementing vulnerable customer processes in an effective or consistent manner in several areas. This risks poor outcomes for these customers.
The Consumer Duty
This review did not consider files against the requirements of the Consumer Duty since it was not in force at the time. However, the FCA noted that it is unlikely that most firms would comply with some requirements of the Duty without taking appropriate action to address its concerns.
Launch of The Retirement Income Advice Assessment Tool (RIAAT)
The FCA has published the Retirement Income Advice Assessment Tool (RIAAT) and accompanying instructions, developed for the purpose of the review to assess the suitability of advice files. This tool will help firms providing retirement income advice understand the FCA methodology and apply a similar standard.
Cash Flow Modelling (CFM)
In addition to the review’s findings, the FCA has published an article which sets out how firms can improve the way they use CFM. It outlines points to consider when undertaking modelling to help firms deliver suitable advice and aid consumer understanding. Firms should also refer to FCA rules for defined benefit transfers which set out requirements for how CFM should be used in similar scenarios.
Dear CEO Letter
In tandem with the findings of the review, the FCA has issued a Dear CEO letter. This draws to senior managers’ attention the FCA’s expectation for how firms must act in response to the findings of the review, and that there will be follow-up supervisory activity.
Further Supervisory Work
Retirement income advice will remain an ongoing focus for the FCA. The FCA states it will be following up on the findings of the review more generally with the firms involved in the retirement income advice market. It is also noted that the FCA will be carrying out further supervisory work in this area to explore the scale of the issues identified and tackle any harm.
The FCA also makes it clear that it will take further action if firms do not address the areas of poor practice highlighted by the review. It will also require firms to rectify instances where customers have not received the level of service expected. This includes the provision of potential redress where appropriate.
How Square 4 can help
Square 4 is actively engaged with a number of financial advice firms providing retirement income advice. We support our clients develop and implement processes and controls to mitigate the risk of consumer harm, aligned with their Consumer Duty obligations. We provide expertise and resources to build and deliver remediation programmes and support with spikes in complaints where consumer harm has crystallised and requires redress. We also support firms to ensure their customer-facing propositions and services are fit for purpose and regulatory compliance.
If you would like to discuss any of the contents of the Retirement Income Advice Review, or how Square 4 can help, please contact a member of the team below or email hello@square4.com.
Simon Goryl, Advisory Director – sgoryl@square4.com
Sara Haworth, Senior Consultant – shaworth@square4.com
Elliot Cooper, Client Partner – ecooper@square4.com
