FCA sets out revamped pension freedom rules

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The FCA has published new rules reacting to the first year of the Government’s pension freedom reforms.

The changes include a ban on sending product application forms with wake-up packs, extending advice requirements to UFPLS and introducing more flexibility around the so-called second line of defence.

However, in a consultation response published today the regulator has extended the deadline to one year for firms to comply with new rules on the margins taken by Sipp firms on cash, pension freedom communications and projections.

Firms will now have until 6 April 2017 to make the necessary changes.

Elsewhere, the FCA proposes banning providers from sending out pension product application forms with wake-up packs and reminders as this “undermines other efforts to encourage consumers to shop around”.

In addition, extra flexibility is to be introduced to how providers deliver retirement risk warnings, otherwise known as the second line of defence. Currently firms must tailor warnings depending on what income option a customer decides to use.

However, the regulator says firms will now be able to deliver the warnings before the customer has decided how they will access their savings.

Requirements around suitability reports and providing personal recommendations on income withdrawals are also to be extended to UFPLS with immediate effect, the regulator says.

It says: “We consider that advisers have a responsibility to explain the implications attached to any pattern of withdrawals from an individual’s pension fund.”

Plans to force Sipp firms to publish the margins they take on customers’ cash accounts will also go ahead.

In September 2015 Money Marketing revealed the growing pressure on Sipp providers’ bottom line as banks cut interest rates.

The FCA estimates firms collect around £60m a year from interest earned on clients’ cash.

The regulator says: “In the same way as for any other asset, projections of future benefits from cash accounts should be projected at the gross rate and take account of future charges by using an appropriate figure for the retained interest charge.”

Talbot & Muir head of pensions technical Claire Trott says: “I am not surprised that the FCA are continuing with this proposal, even with a delay in implementation but as with all illustrations on SIPP this is unlikely to make it clearer for the end client.

“The use of different growth rates for the same asset class by different providers will still mean that the overall reduction in yield will not really be comparable.”

The regulator also confirms plans to change rules on income projections, including for guaranteed annuity rates.

Aegon regulatory strategy director Steven Cameron says: “As we’d expected, the FCA is focussing on how to help individuals understand how sustainable their income is if they are exercising the pension freedoms and using drawdown.

“As individuals have complete flexibility, and don’t need to take a pre-determined amount out each year, this is a highly complex area and very difficult to cover within a key features illustration. With this in mind, we support the flexibility the FCA is allowing.”

However, the paper appears to rule out further regulatory intervention on insistent clients, and said more work was needed to determine whether customers were losing out as a result of commission paid on non-advised annuity sales.