The Financial Conduct Authority has told firms to improve their retirement income advice services after it found both good and poor practices across the market.
The City watchdog found some firms had detailed processes, specific training on decumulation and used a range of tools to help illustrate complex information for customers.
But the FCA found it was “apparent” not all firms were taking account of the differing needs of their customers in decumulation, as opposed to accumulation.
FT Adviser takes a deep dive into what the FCA found.
Cashflow modelling
The FCA said cashflow modelling can provide a reasonable basis for giving advice, but only if the firm uses complete, accurate and up-to-date information.
It found 21 of the 24 firms (88 per cent) it surveyed used some type of cashflow modelling tool.
Most firms could evidence the checks and research they had completed before deciding which tool to use but the FCA found five firms did not appear to have done either.
The regulator said firms should check to see whether the assumptions used in their cashflow modelling are still appropriate and reasonable.
But seven firms did not appear to have carried out any review.
The FCA also expects firms to document the impact of fund withdrawals, predicted inflation and charges on customer investments and the potential for sustaining adequate income in retirement.
Due diligence
The FCA found several examples of firms which appeared to have conducted no due diligence on the third party tools and services they used to provide retirement income advice.
In one example, the firm did not complete any due diligence and relied primarily on industry events and conferences to decide which tools or service providers to use.
Another firm was unable to provide evidence of its last platform review or explain how it continued to meet the needs of its customers while a third firm acknowledged its platform did not fully meet the needs of its customers in decumulation but did not appear to have taken any steps to address this.
The FCA found a small number of firms had robust procedures for assessing whether platforms were appropriate for their customers. They showed detailed due diligence was carried out, with frequent monitoring and reviews to ensure the platforms continued to meet the needs of their customers.
But it also found more than a third of firms did not carry out regular reviews to ensure the platforms they used continued to be appropriate.
Risk profiling
The FCA has highlighted that firms were not distinguishing between accumulation and decumulation in their risk profiling.
“This meant the language and questions were not specifically framed for customers in decumulation,” the FCA said.
“Although, generally, the example questionnaires we saw were clear, with unambiguous questions and descriptions, some were written with an accumulation specific focus. This means customers could be inaccurately profiled and take on risk not in line with their circumstances.”
One firm had a three -step process for risk profiling, risk tolerance, risk capacity and knowledge and experience. Each stage was based around a discussion with the adviser and there were no standard questions to guide the discussion.
