Twelve months into the coronavirus pandemic, the FCA’s second suitability review of retirement advice is still deferred with no indication when it will eventually happen.
But happen it will. While the Covid-19 crisis continues to dominate our lives and to impact on the FCA’s critical priorities, the regulator’s second suitability review will kick off when our lives return to a bit more normality. All of us are hoping this is sooner rather than later.
The FCA’s timelines may have slipped for very good reason, but the regulator’s spotlight on ensuring better outcomes for consumers at retirement remains undimmed.
It’s why now would be a good time for advisers to take a step back and take stock of what the industry has achieved since pension freedoms were introduced. So when the FCA eventually starts work on its second suitability review, advisers are ready and prepared.
There’s a template now in place for what good looks like
Pension freedoms marked a seismic shift for the industry when they were launched almost six years ago. While the FCA prioritised guidance for the non-advised market who were most at risk from the changes, advisers stepped up and took responsibility for supporting a huge weight of demand from those wanting advice. Within the advice market, the regulator focused on the high-profile issues arising out of the massive client interest in Defined Benefit (DB) transfers.
Now, with the FCA publishing further guidance on suitable DB transfer advice including finalised guidance published at the end of March, FG21/3, underlining the importance of good processes and controls as well as Investment Pathways, which concludes the final proposal for the non-advised market in its Retirement Outcome Review, the regulator has cleared the decks, ready to focus on that part of the retirement market it hasn’t yet examined - Defined Contribution (DC) advice.
This was highlighted in the Dear CEO letter the FCA sent out to adviser firms at the start of last year. As well as giving advisers more certainty about expectations for good outcomes, the letter was essentially encouraging advisers to take stock and plan.
The good news is that the industry should be pretty clear by now about what the regulator will be looking for. With all the work the FCA has already carried out around DB transfer advice, there’s a template in place for what good looks like to help advisers establish a process for DC retirement advice.
The DB transfer advice and DC retirement advice conversations are actually very similar. The only difference is the starting point. With DB advice, it’s about supporting the client to identify if a guaranteed income for life (the DB scheme) or a transfer to, most likely, a flexible arrangement to better meet their needs, is the most suitable outcome for them. And with DC advice, it’s about supporting the client to determine if they need a guaranteed income for life in the form of an annuity, and/or how to best use their savings in a flexible arrangement to meet their needs.
Advisers could take a look at the steps taken in their advice to DB transfer clients and the steps in their retirement advice to DC clients and compare the two. There may be differences but it’s about recognising that if a set of processes are followed, the client can make the right choice for them between a guaranteed and/or a flexible income at retirement.
Why the FCA's just-published finalised guidance FG21/3 is so valuable
The FCA’s various Policy Statements on pension transfer advice, including the latest one, PS20/6, are really worthwhile documents advisers can read. They explain in simple terms why the regulator proposes the changes it does as well as setting out those changes. It makes it easier to decide how the proposals could apply to DC retirement advice and to see what the FCA is trying to achieve for good client outcomes. Compared with the regulator’s more technical Conduct of business sourcebook (COBS), the Policy Statements are useful support guides as they’re clearly written and accessible.
The FCA’s hot-off-the-press finalised guidance FG21/3 is even more valuable to advisers, however. It contains some great examples of good and poor practice which help to bring the DB transfer rules to life.
One other useful and accessible tool for advisers is the FCA’s recently-launched Defined Benefit Advice Assessment Tool (DBAAT). The regulator designed it for its own team to review DB transfers. It’s not fool proof, but provides useful insight into areas the FCA has already focused on. DBAAT is essentially a checklist that sets out key factors advisers should consider when going through the suitability of their retirement advice so they can see what’s expected by the regulator.
Controls and processes to deal with the client bias risk
Pension freedoms gave consumers the ability to do what they wanted with their retirement savings. And driving the surge in demand for DB transfer advice were those clients who had already decided they wanted to transfer before they had even approached an adviser.
As it’s the adviser who’s held accountable by the FCA for ensuring the client makes the right decision for them, the challenge is bringing the client conversation back to neutral so that advice can be given safely with the client open to it.
It’s why bias is a key focus area for the FCA. It’s as concerned about client bias as it is about potential adviser bias which the ban on contingent charging underlined. Some of the regulator’s early policy changes highlighted client bias, for example its guidance on Attitude to transfer risk, and covered off in FG21/3 to help advisers overcome client bias in the DB transfer market. The guidance asks for evidence that advisers have asked the right questions in the fact find so the client’s behavioural and emotional responses can be documented. It’s a process the regulator wants to see embedded in adviser firms to help overcome client bias and ensure good outcomes.
While the guidance on Attitude to transfer risk was designed for DB transfer advice, the lessons on clearly documenting clients’ behavioural and emotional responses in DC retirement advice are equally valuable.
The Covid-19 crisis has led to more vulnerable clients
It’s probably never been more important to deal with client bias as the impact of the pandemic on consumer behaviour means the risk of poor outcomes has only increased.
Many more clients will be under pressure as a result of financial difficulties due to the Covid-19 crisis. These difficulties could be wider than just themselves, with worries perhaps about their families and a desire to help.
This pressure effectively brings these clients into the category of vulnerable customers. The definition of a vulnerable customer covers individuals who are under extra pressure, even if it’s a temporary issue. In a sense, although advisers have some breathing space to review their processes around retirement advice, the pandemic has emphasised an increased risk of client bias and getting good controls in place as more clients than ever may be exposed to making bad decisions.
Start preparing now to get ahead of the curve
The pandemic has temporarily paused the FCA’s important work into the suitability of retirement advice. But the pause offers advisers the perfect chance to take stock, examine how they give retirement advice and improve processes if required to meet the regulator’s expectations.
Despite changes in business practices to adapt to remote working, which have arguably led to more efficiencies within adviser firms, the FCA’s expectations that existed pre-pandemic will still exist post-pandemic.
Although shifting priorities by the FCA may be a regular feature for the foreseeable future, it doesn’t take away from the need to ensure good outcomes for clients at retirement. And advisers have the opportunity to get on the front foot now. Because once the regulator’s second review does get underway, all of us should be well placed to ensure the industry earns a clean bill of health and to help build confidence in the system.
Read Alastair Black’s previous blogs on The suitability of retirement advice, better outcomes and the journey ahead and Assessing capacity for loss.
The views expressed in this blog should not be regarded as financial advice.