Back in January, the FCA announced its intention to scrutinise the retirement income market. Its findings are due to be published by the end of the year.

You’d be forgiven for forgetting all about this review, as Consumer Duty has been so all-consuming, but put it in your diary because the results will be the first real flex of the regulator’s new enforcement powers.

The FCA is keen to see how the 2015 pension freedoms have impacted on the quality of advice clients receive, particularly at the first point of contact. As its review has taken place during and after the implementation of Consumer Duty, we expect it to be key in assessing how firms have adopted the regulations.

It is important to note that the rules are not backwards looking, but you will be expected to show how ongoing services, which include pension income advice, reduce the risk of harm and enable clients to make effective decisions. This, in turn, will have an impact on the regulatory framework going forward.

Addressing concerns

Pension freedoms were a significant shift in the marketplace, giving consumers access to their savings without limit or cap.

Since their introduction, annuity purchases have fallen significantly, with clients favouring flexi access drawdown (FAD) and withdrawals via uncrystallised funds pension lump sums (UFPLS). However, as annuity rates are so high at the moment, they are looking like a much more desirable option and should be considered in any ongoing reviews.

The FCA publishes retirement plan data annually and in 2021/22, 33.4% of pensions accessed for the first time were done so by holders who took regulated advice, which is a slight increase from 32.7% in 2020/21. There was also a rise in the overall value of money being withdrawn from pension savings. Yet 40% of regular withdrawals were at an annual rate of more than 8% of the pot value, suggesting a potential risk that consumers will exhaust their savings before they die.

The move from taking secure pension income via annuity to a more flexible vehicle – and the impact this has on consumers – is likely to be a key consideration for the FCA review. It will no doubt focus on firms’ advice process, not only at the initial point of access, but also during the product life cycle, which you can influence through the tendency towards ongoing advice services.

Another motivating factor for the review is the likely conclusion of the regulator’s work in the DB transfer market, as many of the reassigned schemes ended up in flexible arrangements. In addition, one of the conflicts of interest in pension transfers was the practise of contingent charging, which was eventually banned in most cases. It is likely, therefore, that the FCA will want to see if similar risk exists within the retirement income advice market. For example, is there a conflict in the ongoing service revenue a firm receives when advising a client on a FAD or UFPLS, rather than a secure income via an annuity?

Time to take stock

Once the FCA’s findings are published, we will be disseminating them to you and rolling out tailored support to address any particular issues raised. This will include reviews of the pension income advice process and file checks, to look at the suitability of your advice and whether consumers are being made aware of potential risks.

There is a big crossover here with Consumer Duty and it could be deemed potential harm may occur if the client can’t make an effective decision because the suitability of advice is unclear. If the FCA finds firms are failing to look at the ongoing suitability of flexible vehicles, it could impact on your ability to evidence fair value. Likewise, fees will be under scrutiny, particularly the value of advisers’ ongoing service charges.

The review will probably mean additional work for most firms (although any new regulation will be a way down the line), as the FCA will expect you to assess existing processes and make any relevant changes. However, if a detailed benchmarking exercise was carried out as part of the Consumer Duty implementation process, the level of effort required could be minimised.

We will be offering our clients more guidance once the results of the thematic review are made public. If you have any questions about the delivery of retirement income advice, don’t hesitate to contact us on (0161) 521 8641 or email: info@b-compliant.co.uk

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