The regulator is coming: the new thematic review of retirement income advice
On 19th January 2023, the FCA announced it is undertaking a thematic review assessing the advice consumers are receiving on meeting their income needs in retirement.
Why is the FCA focusing on retirement income?
The FCA is looking to tackle one overarching harm: people not having adequate income, or the income they expected, in retirement. The FCA wants to know these harms are being avoided, particularly in cases where professionals have been paid to provide suitable advice.
The FCA knows that behavioural basis and information gaps can contribute to poor decision-making around pensions. These can include a focus on short-term gains and losses and consumers under-or-overestimating their own longevity.
The FCA’s views are informed by its Retirement Outcomes Review from 2017 which focused on consumers who make decisions without regulated financial advice. The study found that a third of consumers who had gone into drawdown did not know where their money was invested, while another third had only a broad idea. Some providers are defaulting their customers into cash or cash-like assets, meaning they could lose out on investment growth. And so there is a real opportunity for good advice to make a difference. The FCA wants to make sure this is happening.
A big part of the review will be how businesses arrive at and then present their recommendations. Knowing how a customer wants to use their pot during their retirement will be an important factor in deciding the most appropriate investment. Likewise, the FCA would be concerned if firms are steering consumers to options that would not be in their best interests. How firms present choices to consumers can have a very significant impact on the decisions consumers make. The FCA calls this the “framing effect”.
The FCA will want to see that consumers are engaged in, and have an understanding of, the investment choices they’ve made. If clients with differing circumstances are given the same advice, the FCA will likely question the methods used to arrive at recommendations. Overall, the FCA will want to avoid feedback along the lines of the below from advised consumers. This is an extract taken from the FCA’s Retirement Outcomes Review:
‘Participant: I have no confidence in the pension industry anyway. I have no confidence in the way it’s performed in my lifetime, and that was on one of the reasons that (sic) I wanted to take my money. Because with the interest rates as they are, and I’ve lost such a lot of capital over the years, I didn’t see that there was any great benefit in keeping my money in there and I’d rather have it to spend’
Interview: ‘Did you need the money at the time or was it just more of…?
Participant: ‘Not at all, no, no. In fact, I’ve got significant savings and the money’s just added to my savings and not getting any interest, but I felt that if I wanted to – I, felt I’d rather have it than they have it.’
Participant was aged 60-64. £100k+pot; non-SIPP, has a separate DC pension
The findings will help inform the FCA’s future strategy for the sector. The results will provide an indication of how firms are implementing the Consumer Duty.
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