Regulation  

FCA ‘second line of defence’ focuses on tax and health

FCA ‘second line of defence’ focuses on tax and health

Tax implications of taking irregular income or going into drawdown and health considerations for those purchasing an annuity will form the basis of the second line of defence providers will have to provide from April, the Financial Conduct Authority has said.

Today (27 February) the regulator published its without-consultation intervention to offer additional protection to clients accessing income under new pension freedoms, including requiring providers to offer risk warnings where client’s state they have taken advice or guidance.

The only exceptions to providing the personalised risk warnings will be if an adviser is acting on a clients behalf or if warnings have already been provided. Providers will need to ask limited personal questions and offer warnings specific to the method of access.

Crucially, the FCA says it will not provide a template of the content or format of what the ‘second line of defence’ warnings should look like, leaving it up to providers to design the wordings. Alerts will need to be tailored but can follow a templated format.

The regulator has focused on the consumer’s state of health as a risk factor with annuities, telling providers to find out whether there are aspects of the consumer’s health or lifestyle that would make them potentially eligible for, for example, an enhanced annuity.

Under this bracket, the FCA has said if the answer to this is yes or unclear then a risk warning needs to be provided.

In July last year, the Pension Income Choice Association were calling for the regulator to make it mandatory to ask “five or six health questions” of every client prior to selling a pension saving product.

Tax implications also topped the FCA’s list for drawdown or uncrystallised lump sums, telling providers to ask whether consumers understand the tax implications of withdrawing money from their pension savings.

If the answer to this is no or unclear, the provider is to give a warning under the regulator’s rules.

Other risk factors include loss of valuable guarantees, whether the consumer has a partner or dependents, inflation, whether the consumer has shopped around, sustainability of income in retirement, charges, impact on means-tested benefits, debt and investment scams.

The paper states: “We expect firms to develop appropriate risk warnings. These will be specific to the way the consumer has decided to access their pension savings, and specific to the personal circumstances outlined by the consumer in response to the firm’s questions at step 2.”

Christopher Woolard, director of strategy and competition at the FCA said: “The pension reforms give those people who are nearing retirement greater choice on what to do with their pension pots.

“We want to ensure that they get the right information so that they can make informed decisions about their future.”

ruth.gillbe@ft.com