Dear CEO | Release Date: 20th March 2024
To read a shorter summary of this Dear CEO letter, click here.
To access the original FCA document, click here.
Long Summary
The Financial Conduct Authority (FCA) has recently completed a thematic review of retirement income advice offered by firms. The review’s findings, which were published and shared with industry leaders, show a spectrum of practices ranging from highly effective to those likely causing poor customer outcomes. This variation underscores the need for a consistent approach to meet the standards set forth by the FCA, especially following the 2015 pension reforms which significantly increased the complexity and flexibility of retirement planning.
Key Findings and Areas of Concern
The review identified key areas where firms are either excelling or failing. A number of firms demonstrated good practice by aligning their advice models closely with customer needs, likely leading to favourable outcomes. Conversely, there are firms whose practices do not sufficiently meet customer needs, thereby risking poor outcomes. Specific concerns include:
- Income Withdrawals: Methods used by some firms did not take into account individual customer circumstances and were often based on unjustified assumptions.
- Risk Profiling: Inconsistencies were found between the risk profiles created for clients and their stated objectives, knowledge, and experience. Some profiles also did not adequately consider the client’s capacity for loss.
- Information Collection: There was a notable failure in obtaining necessary customer information to demonstrate the suitability of the advice given.
- Periodic Review of Suitability: Firms that charged for ongoing advice services sometimes did not deliver regular reviews, which are crucial for adapting to changes in clients’ circumstances.
- Record Keeping: Records were often inaccurate or insufficient, impairing the ability of firms to assess outcomes or verify the delivery of services.
FCA’s Strategy and Vision
The review is part of the FCA’s broader Consumer Investments Strategy, which aims to maintain high standards in the consumer investments market. This strategy is crucial as the market evolves to include new forms of advice and support. The FCA envisions a market where consumers:
- Can access timely, affordable help.
- Invest with confidence and understand associated risks.
- Find investments that match their risk tolerance and circumstances.
- Are protected from scams and have access to essential information and safeguards.
The Consumer Duty
The review also addressed the upcoming Consumer Duty, which was not in force at the time but is expected to influence future compliance. The Duty requires firms to act in good faith, avoid foreseeable harm, and support customers in achieving their financial objectives. Most firms are likely to require changes to their practices to meet the standards of the Consumer Duty.
Actions Requested from Firms
Internal Review and Compliance: Firms are encouraged to assess their own practices against the findings of the review and make necessary adjustments to align with FCA requirements. This includes improving the advice process, enhancing customer outcome monitoring, and ensuring that all practices are up to date with regulatory standards.
Use of Tools and Resources: The FCA has introduced the Retirement Income Advice Assessment Tool (RIAAT) and published an article on Cashflow Modelling (CFM) to help firms improve their advice processes. Firms are urged to use these resources to better understand and implement the recommended practices.
Engagement and Reporting: Firms should engage with the questions provided in the FCA’s data survey to enhance management information systems. They must also report any significant findings or changes to their practices as part of their ongoing regulatory obligations.
Ongoing Supervision and Support
The FCA plans to continue its focus on retirement income advice, with further supervisory activities planned to address and mitigate the issues identified. The authority will also follow up with firms individually to ensure that improvements are implemented and maintained.
Conclusion and Key Takeaways
Firms must take immediate and thoughtful action to align their retirement income advice services with the findings and recommendations of the FCA’s thematic review. Key actions include:
- Reviewing and adjusting advice processes to ensure compliance with both current regulations and the forthcoming Consumer Duty.
- Utilising tools like RIAAT and guidelines on CFM to enhance the quality of advice.
- Actively engaging in ongoing improvement processes and maintaining open lines of communication with the FCA.
By addressing these areas, firms can significantly enhance their service quality, thereby ensuring better outcomes for their clients and aligning with regulatory expectations.