The Financial Conduct Authority’s announcement of its thematic review into retirement income advice earlier this year should not have come as a great surprise to the advice sector.
Many of the tell-tale markers of regulatory attention have been present in this area for some time. The impact of the rising cost of living and recent macroeconomic events will have also reinforced the case for the regulator taking a closer look at this topic sooner rather than later.
So why is the FCA interested in retirement income advice and what can companies do to prepare for it?
First in-depth look at retirement advice since pension freedoms
The government’s pension freedom reforms have had a seismic impact on how consumers access their pension benefits, and the aftershocks – in terms of consumer behaviour and the evolution of products and services – are still being felt.
Prior to pension freedoms, three-quarters of defined contribution pension pots were used to buy an annuity. The FCA’s latest retirement income market data shows this has fallen to less than 10 per cent of pots.
And for larger pension pots of £50,000 or more, almost 90 per cent of advised recommendations are for solutions that remain invested (via income drawdown and uncrystallised funds pension lump sums).
This sharp pivot from secure to investment income will be a key area of regulatory focus given the consequential impact on consumers.
Recommendations to generate a sufficient, sustainable income from assets that remain invested place a premium on the quality of companies’ advice processes: not just at the point clients first access their pension benefits, but also as part of any ongoing services firms provide to their clients.
The FCA will therefore be keen to assess how companies’ advice processes manage these risks and whether they are delivering suitable advice consistently.
Mind the (regulatory) gap?
A key aim of the thematic review will be to help the regulator explore the effectiveness of the existing regulatory framework for retirement income advice.
There is a stark contrast between the detailed rules and guidance governing defined benefit pension transfer advice and the high-level suitability rules within Cobs 9 governing other forms of pension advice.
While there is nothing inherently wrong with higher-level rules, they rely upon companies to interpret and apply them effectively in each situation.
And in more complex areas, such as delivering a sustainable income in retirement, companies need to work harder to “fill in the gaps” in order to assess suitability in a robust and consistent manner.
The FCA will no doubt want to explore how the suitability status quo is holding up and whether further intervention – in terms of additional guidance or new rules – could be necessary.
In search of orthodoxy
Another likely driver for the review is the fact that, some eight years after the pension freedoms were introduced, there is still limited orthodoxy within the market on some of the key building blocks of good retirement income advice.