Guest Spot: Assessing Suitability – Times are changing for retirement advice

  • Author : Stuart Slegg
  • Date : 27 Jul 2020

In this Guest Spot Stuart Slegg of Just discusses six key themes highlighted in a recent Assessing Suitability II webinar, featuring Rory Percival, held on 27 April 2020 by Novia and Just Group.

The FCA recently announced the Assessing Suitability Review II to look at how retirement income advice is being delivered.  What are the six key themes as highlighted in a recent Just /Novia webinar.

The Retirement Income landscape is very much on the FCA’s radar. Earlier in the year the FCA issued a ‘Dear CEO’ letter announcing amongst other things, Assessing Suitability Review II. The review will focus on how Retirement Income advice has and is being delivered to the consumer and is set against a backdrop of both PROD and SMCR. This article discusses six key themes highlighted in a recent Assessing Suitability II webinar, featuring Rory Percival, held on 27 April 2020 by Novia and Just Group .


Let’s start with meeting PROD requirements

How you do you organise Retirement Income advice for your clients?

The Product Governance Sourcebook or PROD was introduced to ensure that a firm structures their advice proposition in a client centric way that delivers good customer outcomes. It requires an advice firm to:

  • Understand the financial products and services distributed to clients.
  • Access the compatibility of the products and services with the needs of the client, taking into account the identified target market.

Ensure products and services are only distributed when in the best interest of the client.

A key requirement of PROD is for firms to identify a target market for each of the products recommended to their clients and that the target market identified should be at a sufficiently granular level. In order to achieve this it becomes paramount to consider segmenting your client bank by breaking broad cohorts of clients into smaller subsets based on their underlying needs, objectives and characteristics.

For example, clients taking a retirement income could be broken into smaller subsets based on their capacity for loss and or views on security vs flexibility. Clients with a lower capacity for loss are likely to require a greater degree of certainty from their retirement income solution.

Firms then need to ensure that the specific needs and objectives of each sub-segment is taken into account when designing and developing the retirement income proposition and service they offer.


Is this all documented and consistent?

A firm’s approach to PROD must be documented.

Firms are required to regularly review the products and services they recommend. The firm’s management has full accountability for the governance process and its documentation. The compliance oversight functionmust also monitor both the development and periodic review of the process.


Do you have a Centralised Retirement Proposition(CRP)?

CRPs recognise that there are key differences between accumulating money for retirement and applying that money during retirement to provide an income. It’s intended to provide a framework to ensure that clients with similar needs, aims and risk profiles end up with similar recommendations.

As a client transitions into decumulation the key drivers underpinning the decision-making process should change. CRPs enable a shift in focus from a subjective assessment of attitude to risk provided by the client to an objective assessment of capacity for loss calculated for the client and based on their ability to absorb falls in the value of their investment.

This shift in emphasis is much broader than just implementing a differentiated investment proposition and should also consider process. For example, a CRP willneed to consider how to deal with some of the challenges clients face in later life such as changes in health.


Can a CRP be influenced by behavioural bias?

We’re all prone to unconscious emotional and cognitive bias. One of the best ways to manage biases is to be conscious that they exist. From a retirement income perspective biases can surface at a firm level in the way propositions are designed and developed and in the way advice is provided to clients.

It’s important to ensure there’s a framework in place for managing these biases at firm level to ensure that products recommended to clients are aligned to their needs and objectives. The ‘Dear CEO’ letter referenced that conflict of interests must be identified and where they cannot be prevented, disclosed and managed.

Considering the impact of unconscious bias at client level is also important. A 2014 FCA study talks about how the impact of framing retirement decision-making through an investment, rather than a consumption lens, impacts outcomes. Clients spend their entire working lives accumulating pension wealth and the risk of losing those savings looms large as they transition into retirement income.

When viewed through an investment frame, mental accounting and loss aversion can explain the unpopularity of annuities in retirement income planning. This is because annuities can often be seen as risky gambles where potential losses loom larger thanpotential gains. However, these views often change when the solution is viewed through a consumption lens.

It’s therefore important to have a retirement income framework in place which manages both bias at a firm level and client bias too. It will also cut through any adviser bias to ensure they don’t cloud conversations about a client’s true needs and objectives.


Dealing with potentially conflicting needs of flexibility and security

The FCA recently published GC20/1 which provides guidance on the FCA’s expectations when advising on pension transfers and conversions. There’s clearly some areas within this consultation that can be applied to retirement income advice more broadly.

For instance the guidance recommends that firms should consider splitting income needs into essential, lifestyle and discretionary, that understanding a client’s essential income needs as well as their desired lifestyle and discretionary expenditure is key to establishing a client’s capacity for loss as well as balancing their specific needs and objectives.

PS18/6 Advising on Pension Transfers introduced the concept of attitude to transfer risk when recommending a DB transfer. GC20/1 emphasises that this is an assessment of your client’s behavioural and emotional response to the risks and benefits of giving up guaranteed benefits and suggests firms consider implementing a range of balanced, open questions, using language that’s free from bias when exploring this with clients.

In addition, COBS 19.1.6G (4) (b) provides a range of factors a firm should take into account before recommending a transfer. In our view the key questions in this area from a retirement income perspective are:

  • What’s the client’s attitude to certainty of income in retirement?
  • The client’s thoughts on the risks and benefits of flexibility
  • Is the client likely to access funds in an unplanned way?
  • The likely impact of the above on the sustainability of the funds over time
  • The client’s attitude to and experience of managing investments or paying for advice on investments so long as the funds last.

We also believe that a key area to consider is yourclients’ health and lifestyle. Both these factors can enhance the retirement income options avalaible to your client and align to some of the more generic best practice outlined in GC20/1 as well as COBS 9.3.3.

There’s a clear indication to how the FCA are likely to view the type of factors that should be considered when trying to balance a client’s objectives between security and flexibility in broader retirement income advice.


Time to review your Retirement Income advice framework?

As we head towards the FCA Accessing Suitability Review II in early 2021, now seems like a good time for a review of your Retirement Income advice framework.

The statements and opinions expressed in the Guest Spot are those of the author and do not necessarily reflect those of Novia Financial plc or any of its employees. The company does not take any responsibility for the views of the author. Any links, web pages and documentation within the Guest Spot are provided by pages maintained by independent third parties and Novia accepts no responsibility for the availability, content or use of the information contained within them.

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