The Financial Conduct Authority needs to change its stance on at-retirement advice in the wake of Budget reforms to remove an implicit pro-annuities approach and more accurately reflect risk, according to Fiona Tait, business development manager at Scottish Life.
Speaking to FTAdviser, Ms Tait said the regulator’s rules are close to 20 years old and biased in favour of clients guaranteeing income through annuities, but that this needed to change to reflect the wider array of options and the more phased approach to retirement that is coming to the fore.
She explained: “I don’t think they saw which way the wind was blowing at all so they really haven’t changed their stance on at-retirement advice since 1995, which was when drawdown first came out.
“Rather than saying ‘why not an annuity?’ you are saying ‘why drawdown?’, or ‘why short term?’, or ‘why UFPLS?’ or whatever it is. I still think a lot of people will buy annuities but I believe a lot of them will buy them later.”
Ms Tait acknowledged that drawdown is not the safest route despite its ever-growing popularity, but that the regulator currently does not make enough of the risks with annuities in relation to inflation erosion.
“I’d like a change of emphasis from the wider annuity to ‘at what point do people buy the annuity?’, and not the sort of blind faith that as soon as someone is taking income that will be the safest route.
“They’ve got a list of risks that you take with drawdown which are fair enough because you do, but there is an implication is that [with] an annuity there is no risk. Inflation is a massive risk, so a recognition that there are different risks is needed.”
Ms Tait’s comments reflect comments made by advisers in the wake of the Budget changes, which cited FCA reviews that they claimed displayed an anti-drawdown bias and generally a preference for recommendations to clients to purchase annuities to guarantee income.
In contrast, Tom McPhail, head of pensions research at Hargreaves Lansdown, previously told FTAdviser he was concerned annuity alternatives such as drawdown are seemingly no longer deemed as risky as they were prior to the Budget.
Mr McPhail, along with Kate Smith, regulatory strategy manager at Aegon, also separately called for do more to close a potential mis-selling loophole that could lead to sales by unregulated advisers of the new uncrystallised lump sum option under pension freedom reforms.
Phil Mowbray, the head of retail services at Moody’s Analytics, told FTAdviser there was a need for the FCA to produce specific guidance on suitability and risk in the retirement ‘decumulation’ market in light of the radical changes announced at the Budget.
Mr Mowbray also said there was a case for the regulator splitting its retail investment advice category to create a specific regime for at-retirement advice.
Ms Tait added it was unfair to criticise the FCA because the pace of change has been difficult to keep up with.
“What’s happened is that almost out of left field the government have made this massive leap into the modern world of pensions and everybody else has been left behind, we are all just trying to accommodate it.”
Ms Tait also emphasised the need for a more succinct approach to how information is conveyed to clients, which she said is an area in which current regulation “hinders rather than helps”.
“Obviously you want to protect the end client - I’m not saying that you don’t - but there is so much information that has to be given to people that the sheer volume of it obscures the really important things.
“I think it would be good to have some sort of review on what a pension statement looks like, what it has to contain, what should be prominent and what shouldn’t, to get some consistency.”
ruth.gillbe@ft.com
