Regulatory Risk and Rectification – September newsletter

Wealth

Following the FCA’s recent reminder of best practice when delivering retirement income advice, this edition looks at the key areas firms should focus on.

Retirement income advice

FCA’s expectations around retirement income advice are nothing new. Their thematic review was published in 2023 and almost two years on they have published their guide highlighting areas of good, and not so good, practice based on this review. As an area which may not have been high on the priority list for firms, this recent guidance will serve as a reminder that this is very much an area of ongoing focus for the FCA.

Key areas raised by the FCA’s thematic review include:

Advice suitability	Are clients receiving quality advice that supports them in meeting their objectives? Are advisers sufficiently documenting their recommendations?
Understanding of client	What is the quality of fact finding? Are client’s objectives and circumstances well understood and detailed? Has the adviser considered how the client’s needs and circumstances may change over time, and considered any characteristics of vulnerability?
Risk profiling	Are firms regularly and appropriately assessing clients’ attitude to risk and capacity for loss, and tailoring recommendations accordingly?
Centralised retirement proposition	How are firms categorising clients, and what products are recommended to each category of client? Is the range of investments available to the adviser appropriate to provide good solutions for the different categories of clients?
Income withdrawal approach	How are firms modelling sustainable income withdrawal? Does the cashflow modelling approach used meet the FCA’s expectations? If CFM isn’t used has the adviser credible evidence to support a sustainable withdrawal rate.
Control framework	How are firms’ systems and controls, and MI enabling effective management and oversight of retirement income advice? Is sufficient MI being recorded and periodic review services delivered?

Arguably many of the areas of good practice identified would appear to be common sense: detailed information gathering; reviews of risk profiling assumptions; and revisiting modelling when a client’s circumstances change. These will be common practice for many. However, the FCA is expecting firms offering retirement income advice to take relevant action following this guidance. Although subjective, firms should at least be able to demonstrate they have considered all the areas identified in the FCA’s guidance as part of their “relevant action“. With a number of firms already receiving individual feedback on where advice has fallen short, this is not the time for complacency and firms can be expected to provide potential redress if on review their advice falls short of the FCA’s standards.

The right tool for the job

Many firms will already be familiar with FCA’s Retirement Income Advice Assessment Tool (“RIAAT”). Introduced to support firms in reviewing advice it will require further development of policies and procedures and documentation of outcomes. Although firms are not required to use the RIAAT, the FCA has been using this to sample files in their review. Therefore, using the RIAAT as part of a self-review could prove valuable in pre-emptively identifying areas for improvement before the FCA gets there first.

Another tool identified in the FCA’s review is cashflow modelling (“CFM”). As with the RIAAT, whilst it is not a requirement for firms to use this, it is a tool that may be useful for some. Firms may turn to CFM to support clients in assessing their future income needs and the FCA identified several areas in their review where CFM in particular helped demonstrate good practice in managing retirement income sustainability. The level of sophistication in these models can vary and any additional complexity will carry additional risk. In other words, simply adopting CFM isn’t enough. Firms need to ensure a good understanding of their modelling processes and be able to justify any underlying assumptions. The FCA’s guidance on CFM published in 2024 continues to be relevant here and firms are encouraged to read this alongside the FCA’s guidance on retirement income advice.

How can Isio help?

End to end review of retirement income advice process. Review of template documents including fact finds, cashflow models, risk profiling and suitability reports.

Review and comparison of processes against the findings of TR24/1, FCA rules and guidance and industry best practice. Recommendations for improvements.

Review of a sample of retirement income advice files, using the FCA’s RIAAT tool to assess suitability and how the advice is being applied in practice.

Review the internal controls framework as well as guidelines and parameters adopted by the internal quality checking function and how this operates in practice.