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6m read
Jun 2020
John Lappin
Industry editor and Money Alive advocate

Pension transfers may be grabbing the headlines again, but retirement advice for all clients is set to come under renewed FCA scrutiny.

Regulatory expert and former FCA staffer Rory Percival sets out what advisers and adviser firms can do in the latest webinar from Money Alive entitled Retirement Income scrutiny: Can you demonstrate an unbiased approach?

Percival brings his usual rigorous analysis to the issue, considering what is driving the FCA’s work and crucially how advisers should respond.

The FCA’s direction of travel

The regulator highlighted its concerns at the PFS conference in autumn last year, with the FCA director of life insurance and financial advice Debbie Gupta saying advisers should apply the FCA’s thinking on DB transfers to all retirement advice.

The recent Dear CEO letter to adviser firm bosses flagged retirement income planning as a key concern, and it is now in the FCA’s programme of work. The Assessing Suitability Review II (ASRII) will be solely focused on retirement income advice.

Mapping DB requirements on to broader retirement advice the FCA’s updated transfer rules require advisers to consider a client’s ‘attitude to transfer risk’, which Percival says, means considering the security of DB versus the flexibility of drawdown. Under these rules, advisers need to understand soft facts about the client. Percival says they also need to apply this to broader retirement advice in view of Gupta’s comments.

Yet drawing on his reviews of hundreds of factfinds, he says advisers are not asking about clients’ attitudes to security and flexibility in their retirement income advice.

This is an area that the FCA has quite clearly flagged up. You need to consider this more broadly than just DB. It is not universally done, he says.

He suggests advisers consult the relevant section of the rules governing DB transfers – COBS 19 – which focuses on the attitude to transfer risk and then adapt them into more generic questions and put them into their retirement advice fact finds.

That should include close consideration of needs versus wants.

We believe that the Money Alive videos can also help address at least some of the issues raised specifically around improving client's knowledge of their retirement options from an independent source.

Addressing adviser and client biases

The regulator is also focused on behavioural biases for firms and clients. Percival says advisers might incorporate a small DB pension into a couple’s plans for retirement income but not convert a small DC pot into an annuity for another couple despite it having the same outcome.

He makes the case that this likely flags an adviser bias against annuities, although it is also partly due to status quo bias as well. He mentions academic research suggesting that advisers, when recommending a course of action over another, may stress factors that align with their interests including around recurring income.

Advisers may bristle and say they always act professionally, but he argues, it happens subconsciously.

Percival also believes that advisers need to challenge just how closely wedded they are to approaches such as natural income, agreed withdrawal policies and buckets, all of which may carry biases including different ones among a firm’s advisers.

Percival says there is an idea that annuities are poor value for money among both advisers and clients.

He says this may be because annuities are viewed through an investment frame rather than as a kind of longevity insurance. The value of the security they provide may be higher than the pounds worth of income they provide.

Clients also have contradictory opinions. A 2018 survey, asking consumers nearing retirement if they would want to buy an annuity saw 10 per cent agreeing. However, it saw 79 per cent saying they wanted a secure income in retirement, highlighting the problem of perception among clients.

Our view at Money Alive is that this shows the degree of client confusion around the issue of flexibility and security which seems to be at the heart of FCA concerns. A dispassionate consideration of the options around drawdown and annuities could then help with subsequent advice conversations.

Indeed, Percival notes the during previous work at the FCA, which he contributed to such as ‘Assessing suitability: Research and due diligence of products and services’ his team regarded using independent sources of information as a good practice approach. He suggests that the regulator would take a similar view of providing information to clients in the retirement area.

This phase of regulation is about a firm’s professionalism

Percival says that where previous RDR work focused on the professionalism of advisers, initiatives such as PROD and the Senior Managers & Certification Regime are now focused on establishing and embedding professionalism in a firm’s processes which should then lead to better consumer outcomes.

This provides a useful framework for changing a firm’s approach.

The solutions

Percival also looks at the solutions. He suggests variously training advisers around the value of security in retirement income solutions.

He reiterates the benefits of incorporating questions around security versus flexibility, but also of avoiding closed questions that might be biased towards a course of action.

However, more fundamentally, he suggests firms build changes into their centralised retirement proposition.

In this case, a CRP would look at how clients answered questions regarding security versus flexibility with the solutions offered depending on the answers. Thus, the CRP would be a centralised view of what kind of solutions work for different categories of clients.

It could involve taking the retirement income segment of clients and segmenting it further in terms of their attitude to flexibility compared with security. This fits with the requirements of PROD.

Firms should do this formally with board accountability and compliance oversight and record their thought processes.

Set up a formal project

Percival suggests that firms might set up a formal project involving those designing the firm’s propositions, the advisers and indeed the paraplanners. The involvement of more people is likely to mitigate against bias.

It could lead to changes to documentation including in the terms of business and even in the approach to charging. It might inform a brochure for marketing.

Advisers might trail this amended proposition with a pilot group, introduce it to new clients first or bring it in through annual reviews.

We also believe that Money Alive could play a part in preparing clients for those discussions as an independent source of information whether an adviser firm decides to roll out the proposition to new clients or existing clients approaching retirement.

How Money Alive can help

Our view at Money Alive is that change is clearly coming to retirement advice. The FCA is concerned about adviser approaches but also about client's perceptions of their retirement plans in terms of security of income.

Advisers may differ in their views on how fundamentally this should change their processes.

Yet it is clear to us that the regulator will want to see more consideration given to offering clients a secure income for at least a portion of their portfolio.

We see a significant opportunity for advisers using videos to educate clients, as they set up systems to test and counteract their own biases and explain what security of income can mean vis a vis flexible alternatives.

Clients who watch the videos can also ask their own questions which can be passed on to advisers to feed into further conversations and reviews.

Videos could also align with changes in firm's processes, procedures and advice practices all of which should leave firms and advisers in better shape to meet the FCA’s regulatory requirements. They can be also be embedded into a firm’s website and play a role in marketing communications.

Yet perhaps most significantly, it could lead to better informed clients when they sit down with their advisers to plan their retirement.

You can view the full webinar here:

See also