Using cash flow modelling to illustrate suitability of retirement-related advice

The timing of the review also gave the FCA an opportunity to explore how firms were implementing the consumer duty and responding to changing consumer needs due to the rising cost of living.

The FCA sent a 'Dear CEO' letter, including a link to the published review, summarising their key findings and outlining expectations for the future. The letter also set out the next steps the FCA expected firms to undertake:

1. Address the review’s findings 

• Firms should consider the findings and take appropriate steps to meet the FCA requirements on retirement income advice, including the duty, and document how they have done so. 
• They should also refer to the questions in the data survey to identify what improvements could be made to their management information to monitor customer outcomes and respond to regulatory information requests. 
• The report highlights examples of good and poor practice. Firms may find these useful to identify how they can support their customers to make informed decisions, avoid causing foreseeable harm and act to deliver good outcomes for retail customers. 

2. Provision of the retirement income advice assessment tool (RIAAT) 

• The FCA also published the RIAAT and accompanying instructions, developed for the purpose of the review to assess the suitability of advice files. 
• This tool will help firms providing retirement income advice understand the FCA’s methodology. 

3. Refer to the FCA’s article on cash flow modelling 

• In addition to the review’s findings, the FCA has also published an article that sets out how firms can improve the way they use cash flow modelling. 
• It outlines points to consider when undertaking modelling to help firms deliver suitable advice and aid consumer understanding. 

While the FCA’s article on cash flow modelling focused specifically on retirement-related advice, firms should consider the impact on other areas where they use cash flow modelling. There were some key findings and suggestions on what firms can do to improve their client outcomes. 

Cash flow modelling can project a variety of outcomes, depending on the inputs and assumptions used.

There is a risk that clients perceive a detailed projection of their financial affairs as a certainty. 

When used effectively, these outcomes can help clients understand how different economic circumstances could affect their retirement income, as well as the potential drawbacks and risks of the recommended approach. This helps clients make effective decisions and take appropriate action. 

But if used incorrectly, it can create misunderstanding and unsuitable advice. Foreseeable harm can be caused if firms:

• do not consider how clients will interpret the output;
• project forward using returns that are unjustified and don’t result in realistic outcomes; or
• do not consider the inputs and outputs objectively.