Tue, Aug 1, 2023

FCA Thematic Review of Retirement Income Advice - The Regulator’s Probe Steps Up a Gear

The FCA indicated its intention to undertake a thematic review into retirement income advice to assess the quality of outcomes consumers are getting.

Earlier this year the FCA indicated its intention to undertake a thematic review into retirement income advice (otherwise known as decumulation advice) to assess the quality of outcomes consumers are getting.

The UK Government’s 2015 pension freedom reforms have led to a significant shift of consumers drawing an income from pensions funds which remains invested (drawdown).

The FCA had previously planned work on this topic much earlier, however COVID-19 resulted in this being deprioritised. However, the rising cost of living and the natural conclusion to the majority of Defined Benefit Transfer cases means the FCA has understandably decided to prioritise this review.

Last month, the FCA sent an 87-question survey to a sample of approximately 1,300 regulated advice firms, requesting details of adviser charging models and incentive structures.

We understand that a further information request has been received by a smaller sample in response to the initial 87-question survey, asking firms to provide details of advised transactions that involved personal recommendations in relation to decumulation sales.

The letter also advised firms that, as part of its next steps, the FCA may request up to four advice files for review and that this may also include a request for copies of audio recordings (e.g., where advice is given remotely) where available.

What This Means

As part of its thematic review, the FCA is likely to want to engage with the industry further, which might include follow-up calls or onsite visits to discuss the information once reviewed, to gain further clarity or understanding. This is initially likely to be with Senior Managers at the firm, such as the Chief Executive (or equivalent) and/or the Chief Compliance Officer (SMF16), but they may also ask for an adviser to be included.

The FCA will be interested in matters such as:

  • Product and service governance (are the products and services being sold to the right audience, in the right way?)
  • The quality of advice being given (are the products sold suitable for the customer’s needs?)
  • The value of the service (is the service offering fair value and is ongoing advice justifiable?)

The comment in relation to audio recordings is also interesting and, perhaps, demonstrates a regulator that is acknowledging (and perhaps seeking to test more) how advice delivery has evolved since the pandemic. In theory, advice delivered digitally via remote software offers more opportunity for the firm to demonstrate the value of its process and for the FCA to observe the actual adviser-customer conversation. This can, of course, be a double-edged sword for any advice firm, particularly where referrals to the Financial Ombudsman Service are concerned.

Could This Be the Next Hot-Topic?

We think it could be, given the current political and economic climate. The FCA is keen to be seen as acting swiftly and decisively and as the Consumer Duty lurks just around the corner, the regulator will also be interested to see how advisory firms have adapted their approaches to accommodate the new “paradigm shifting” standards. The survey certainly has aspects of the Consumer Duty built into its questions.

The Consumer Duty also raises the bar where purchase or sale of client books (e.g., products or services) are concerned. Firms who are selling a product or service book after the Consumer Duty comes into force must provide relevant information to the potential buyer to help them comply with the Consumer Duty. Conversely, the new rules require the purchaser to gather enough information to satisfy itself that they are meeting the Consumer Duty going forward – where either the buy-side or sell-side has exposure to retirement income advice, it is likely to become more and more important that these sales are considered from a liability perspective.

On this basis, we think it wise that all firms with exposure to retirement income advice seek an objective review of their client-book, regardless of whether they were included in the survey or not.

How We Can Help

We have an established and pragmatic knowledge of consumer protection matters with expertise provided by a team of former regulators and industry experts with knowledge of the regulated advice and investment sector.

Amongst our current clients we have private equity firms, advisory/discretionary wealth managers and networks many of whom we have conducted regulatory reviews for, including reviews of firms’ readiness for the Consumer Duty, advice processes, systems, controls and customer file reviews.

We are also experienced in supporting and advising firms who may be subject to FCA scrutiny as well as acting as a Skilled Person for both Kroll clients and regulatory bodies. We understand such regulatory attention can be daunting, however, we can support you through this process, using our own understanding of, and interactions with, the regulators to advise on the best course of action.

If you have any compliance or regulatory requirements that you would like assistance with, we encourage you to reach out to our experts.

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