Financial advisers in the UK are being asked to examine their processes when providing retirement income advice, following a thematic review that found some “are not even getting the basics right.”

The Financial Conduct Authority (FCA) undertook the review to better understand how the retirement income advice market is functioning, whether advisers are considering consumers’ specific needs in retirement, and whether they’re being provided suitable advice when accessing their pensions.

It’s been 10 years since the UK introduced the Pension Freedoms reforms that changed the way consumers access their retirement savings, giving them more choice around what to do with their money. Since then, those aged over 55 could spend their pension how they please, including withdrawing 25% tax-free. Previously, retirees were forced to buy annuities to see them through their later years.

Following the review, the FCA is concerned there is not adequate support in the market to ensure consumers make sound financial decisions in retirement. It outlined areas where it expects firms and advisers to raise standards.

Review findings

The FCA found not all advice firms are effectively considering sustainability of income withdrawal in retirement, saying many do not use cashflow modelling or do not use it appropriately, potentially leading consumers to make poor decisions.

In terms of advice suitability, the FCA said it had particular concerns over the suitability of advice provided in seven files reviewed. It identified serious deficiencies in fact finding documents and records. These included:

• potential vulnerabilities that were not identified or recorded even where information on file suggested vulnerability may have been present
• knowledge and experience of investments and understanding of risk was either recorded at a high level, inconsistently or not supported by the information on file
• expenditure analysis was not recorded or completed so it was not clear what the minimum income need was or what proportion were essential expenses
• information about wider financial circumstances, for example, other pension provision and the state pension not recorded
• income, including any lump sum capital needs were not quantified or the timeframe for which income was required was not stated
• future lifestyle changes were not explored or recorded, for example, when a partner would retire/receive a pension or how objectives or income needs were likely to change
• it was unclear whether information relating to the risk of capital erosion, the potential for annuity rates to be worse in future, or that income levels might not be sustainable had been disclosed

The regulator also found evidence of fee for no service conduct where customers were paying for ongoing advice but not receiving periodic reviews of suitability, while other firms could not be sure whether reviews had been provided as the information wasn’t recorded.

It also identified firms where processes and systems were not appropriately maintained, including incomplete or outdated advice registers.

“From the advice registers we received, we identified inaccurate or inadequate management information for over half of the firms. In several instances, we found advice registers were so inaccurate that the advice scenario for files we received did not match what was recorded,”

Following the review, the FCA penned a ‘Dear CEO’ letter, asking firms to consider the findings and provided access to a Retirement Income Advice Assessment Tool which was developed for the purpose of reviewing advice files and advice suitability so that they may better understand the FCA’s methodology.

Commenting on the review’s findings, FCA executive director of markets and international Sarah Pritchard said:

 

 

“Financial advisers have a vital role in helping consumers to make the right decisions now to support them long into the future. Decisions for consumers approaching retirement are complex, with the potential for risk.”

“We want to support a sector that can help consumers access pension benefits, invest with confidence and have a sustainable income when they retire.

“Some firms are getting this right and making a real difference to their customers. However, others are not even getting the basics right and putting their customers’ futures at risk. We urge all firms to take on board our findings and review their own processes. Where they do not, we will act.”