FTAdviser trawled through the 139-page consultation paper to bring you the nine key takeaways from the Financial Conduct Authority’s pension freedoms consultation.
1) FCA asks advisers for ‘insistent client’ views
Advisers and providers’ refusal to transfer ‘insistent client’ business is perceived as an “impediment” to defined benefit pension scheme members who want to transfer and take advantage of the pension freedoms.
Anyone with a DB pot of over £30,000 needs to take regulated financial advice, however this is costly and it is likely that the adviser will not recommend a transfer as safeguarded benefits will be lost. FTAdviser revealed earlier this year that advisers are being asked to sign letters stating consumers have received advice, however no advice has been given.
The FCA found that many providers will not accept insistent client pension transfer business while some will not accept any DC transfer business at all. The FCA wants to hear provider and adviser views on how regulation can be amended to allow such transactions more easily, while still providing a satisfactory level of consumer protection.
2) Four “priority risks”
The regulator identified four “priority risks” for pensions and retirement income, including sales and advice, value for money, firms’ management of legacy business and the potential risk of an increase in scams and fraud.
Additional medium to long-term risks include lack of consumer engagement in pension savings, lack of consumer confidence in pensions more generally and the need to develop appropriate consumer protection in a secondary market for annuities, given the risks posed to the individual’s retirement income.
3) Annuity applications prohibited
The Association of British Insurers’ code prevents its members from sending annuity application forms with wake-up packs and reminders, unless specifically requested by the customer, with the FCA proposing to incorporate this into its own rules.
The regulator said that sending such application forms risks “undermining” efforts to encourage consumers to shop around and will create a “more level playing field in the at retirement market”.
4) Illustrations will be restricted
Without corresponding controls around illustrations for any retirement product, the regulator believes that firms could, intentionally or unintentionally, direct customers to a specific route.
Therefore illustrations should only be for the purpose of comparing of comparing all the options offered by the firm. Where a provider sends an illustration that has not been requested by the consumer, it must include an illustration for each pension decumulation product offered and multiple illustrations that are representative of the range of options.
5) When will you run out of money?
The regulator is also consulting on guidance that provides a number of suggestions for ways in which firms can provide information to customers on sustainability of income so that consumers have a better idea of how long their funds are likely to last.
Providers should consider what sustainability risks their products pose and develop appropriate measures to keep their customers informed, along with what additional information should be supplied to customers at times where “significant market movements” have materially affected funds.
6) Suitability reports needed for UFPLS
The FCA rules require a suitability report to be produced whenever a personal recommendation is made in relation to an investment product, including the election of income withdrawals. It also has guidance on the relevant circumstances to be considered when making personal recommendations on income withdrawals and the risks to be included in the report.
When providing advice and preparing suitability reports on ‘uncrystallised fund pension lump sum’, the same considerations would apply as when advising on income withdrawals, the paper said.
Therefore the FCA proposes that advisers produce an “equivalent suitability report” when recommending UFPLS payments.
7) Consultation on axing risk warnings for small pots
The regulator proposed to remove the requirement for a firm to go through the ‘question and answer’ process - step two of the ‘second line of defence’ risk warnings - when a consumer has a pension pot of £10,000 or less and there are no safeguarded benefits.
It does not think step two is beneficial for those with smaller pension pots and that the cost to firms for these clients can be “disproportionate”. This could also “significantly reduce” the compliance burden for firms, while improving the customer experience, the regulator added.
The FCA is consulting on what the ‘minimum level’ should be, but has proposed £10,000 as firms will already have systems and processes set up to recognise this level, so this would be the least costly option.
8) Non-advised services carry bias risk
Not only do non-advised services charge high amounts of commission, but they also carry a risk of bias, with third parties only prepared to offer those annuities that pay the highest amounts of commission.
The regulator proposed three options to deal with the issue, including improved disclosure so customers are far more aware of what commission they are paying, that commission should be restricted on non-advised annuity sales and improved competition, as the issue may reflect an underlying failure of competition.
9) Tackling lifestyle investment strategies
Finally, the regulator wants to know what you think it should do to make firms aware of their responsibilities in relation to lifestyling investment strategies.
It highlighted that in the new environment, these profiles will need to reflect a greater number of options and, hence, increased uncertainty around when people will retire and how they will access their savings.
donia.o’loughlin@ft.com
