The watchdog stated given the number of customers with smaller pots, this could significantly reduce the compliance burden for firms and improve consumer experience in accessing their pension savings, while having a limited impact on any reduction in the protections they receive.
In 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 regulator said it was considering removing step two of the retirement risk warning process. This is where the firm is required to ask the consumer questions in order to identify risk factors.
The regulator said that firm experiences has been that the benefit to consumers from receiving risk warnings is lower for those consumers with smaller pension pots. Similarly, the cost to firms of step two of the retirement risk warning process can be “disproportionate where customers have small pots”.
In a consultation paper produced today (1 October) the FCA stated “We consider that no matter what size the pension pot, there will still be a risk that the consumer does not understand the implications of their decision, for example tax consequences.
“Therefore we also propose that, where the consumer has a pension pot below the minimum level and where there is no safeguarded benefit the firm should still give the consumer appropriate risk warnings by going through the risk warning process without the need to go through step two.
“This does not prevent firms from continuing to go through step two if they consider that given the circumstances, their customer would benefit from step two. We would encourage firms to engage more fully with their customers in this way.”
In deciding on where to set the minimum level the FCA stated it has considered a number of factors including the retirement income different pots sizes might generate, the uplift this might have on an individual’s state pension, and existing monetary limits on the way in which consumers can access their pension savings such as the small pot limit.
The regulator stated it was currently considering setting the level of small pots at £10,000 or less.
The regulator also addressed providers concerns that retirement risk warnings can be delivered without giving regulated financial advice. It pointed out it is not requiring firms to tell consumers what to do or to imply that the consumer’s decision is wrong; that would constitute advice.
The FCA stated: “We are simply requiring firms to ensure that the consumer is aware of the risks arising from the course of action they are seeking to take.”
The FCA also reiterated that is not going to be prescriptive on how advisers deliver the second line of defence.
In April FTAdviser revealed that providers are taking different approaches to delivering the regulator’s ‘second line of defence’ warnings to consumers accessing retirement freedoms, with some going through a verbal process with clients and others insisting on a more formal written questionnaire.
The consultation closes at the end of this month, with final policy to be published in the second quarter of next year.
emma.hughes@ft.com
