FCA expected to crackdown on cash flow planning

FCA expected to crackdown on cash flow planning

Financial advisers should be making sure their cashflow plans are air-tight, as the regulator is expected to intensify its focus on this area.

Rory Percival, former technical specialist at the Financial Conduct Authority, who now runs his own consultancy, told FTAdviser that this will be an area of increased scrutiny in the coming months.

He said he has received anecdotal reports cashflow modelling tools are not necessarily all being used in the right way.

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He said: "Given this big movement of [cashflow planning] being mainstream, and given its role in defined benefit transfers and in drawdown going forward, I think it will increasingly move on to the FCA's radar as an area to look at."

Cashflow planning tools are used by financial advisers to help determine the sustainability of a client's income versus their outgoings over the years of their life, and especially in retirement when it is expected income from employment will dramatically reduce, leaving clients reliant on a limited pot of savings and investments.

But according to recent research from Defaqto, up to one in five advisers are failing to use cashflow planning, and while it is not a regulatory requirement, it can help justify an adviser's recommendation.

To investigate the practice, and help advisers navigate cashflow planning, Mr Percival has launched a guide on the various methods available.

Use of cashflow planning tools has increased since pension freedoms were introduced in 2015, when many thousands more people were able to enter into drawdown plans, meaning their income in retirement would be subject to market forces and may be much more variable than the fixed income provided by the previously widespread practice of buying an annuity.

In October cashflow planning is set to become even more important, as the regulator's new appropriate pension transfer analysis (Apta) is introduced to replace the current transfer value analysis (Tvas) for pension transfers.

An Apta should demonstrate the suitability of the personal recommendation, as well as both behavioural and non-financial analysis, and consider alternative ways of achieving client objectives.

Mr Percival said in practice, this will be done through cashflow planning.

The FCA declined to comment on this matter.

FTAdviser understands the regulator will look into how advisers are conducting the Apta, in line with their current supervision practices. 

Mr Percival said one of the key mistakes advisers make is in a lack of understanding in how the tools work.

He said there are problems in understanding how the maths work - how escalations or revaluations work, whether figures are quoted net or gross of tax and how tax is taken into account.

Mr Percival said: "It is a tool of trade, so people really need to understand how to operate it in some detail."

Another issue is around the assumptions the adviser and the paraplanner use in the tool for measures such as growth and inflation, he said.