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Tony Hicks | Head of Sales, Copia Capital | 2 April 2024

The FCA’s long-awaited review of retirement income advice has now been published. It highlights that while the Pension Freedoms legislation, announced almost exactly ten years ago, brought flexibility, it also added complexity to the financial decisions people face when they are approaching or in retirement.

Consumers are increasingly dealing with investment risk, longevity risk, sequencing risk and inflation risk when making retirement income choices. They are often also managing potentially conflicting objectives such as achieving the lifestyle they want in later life, maintaining a sustainable income through retirement and leaving a legacy to loved ones.

The good news is that the FCA’s review of the advice models and advice files of a non-representative sample of 24 firms found two-thirds (67%) to be suitable. It features many examples of good practice showing advice and services designed to meet the needs of clients in decumulation.

However, it follows that the remaining third was not found to be suitable. Specifically, 11% raised concerns about suitability and 22% had material information gaps, so could not be fully assessed. A further 10% of all files received were missing key documents and could not be reviewed at all. And while the review does not suggest widespread failings, it did find evidence of some poor practice.

Although the regulator is at pains to point out that its findings cannot be considered representative of the sector, it does suggest that parts of the market still have work to do. At a basic level, record-keeping has clearly been found wanting in some firms – not only do you need to comply with the FCA’s rules, but you also need to document compliance.

In addition, not all firms are taking account of the different needs of customers in decumulation as opposed to accumulation, and the very different risks they face. Attitude to risk and capacity for loss processes are both highlighted in the review as areas for improvement, due to cases of them not being evidenced and being inconsistent with client objectives, knowledge and experience. Ensuring that the investment solution aligns with the client’s risk profile and is suitable for their needs and objectives, whatever they may be, is fundamental to delivering suitable advice and good outcomes for clients.

Another area identified as requiring action was the approach to determining income withdrawals. The regulator states that this needs to take account of individual circumstances and be based on justifiable, recorded assumptions. Ensuring that income withdrawals are sustainable is particularly important for clients in retirement who have few other options to boost their income if they start to run out of money too soon.

To provide income that has the flexibility to meet both current and future needs and manage the specific risks faced, advice firms need to consider different investment approaches for clients in decumulation. The wider industry has a significant role to play here in supporting advisers in delivering the best outcomes for clients. It is likely that DFMs will need to start to provide innovative investment solutions that deliver a sustainable long-term income, perform in different market conditions and continue to meet the client’s objectives and risk profile. Similarly, platforms need to offer functionality that supports the different needs of those in decumulation, including flexibility and choice over tax wrappers and managing income streams.

Many of the areas assessed as requiring attention come back to ensuring that Consumer Duty is properly embedded in a firm’s processes, in particular, the need to evidence compliance with the outcomes and cross-cutting rules. Although the review began before the implementation of Consumer Duty, the Dear CEO letter issued alongside it warns that most firms would not comply with some of the requirements of the regulation without taking appropriate action to address concerns raised. Our Consumer Duty Toolkit remains a valuable guide to helping firms establish best practice in their business. You can access the Toolkit here.