The announcement that the FCA is conducting a thematic review of non-advised drawdown came as no surprise to the industry. When pension freedoms were introduced two years ago, drawdown went almost overnight from something used mainly by high-net-worth individuals who received advice to a mainstream retirement income option available to those who do not necessarily seek it.
Given the complexity of drawdown and the investment risk involved, the regulator wants to ensure people understand what they are buying and the risks it entails, even if they have not received regulated advice.
The thematic review, announced earlier this month in the regulator’s business plan for the year ahead, will involve looking at a sample of providers’ sales processes and ongoing communications to see whether firms are complying with the FCA rules and what improvements could be made to benefit consumers.
So what does the industry think of the review and what it might achieve?
Challenges for providers
The general consensus is the FCA is doing the right thing, given the increased demand for non-advised drawdown since the pension freedoms.
As Intelligent Pensions head of pathways Andrew Pennie points out, some people are not understanding the risks and using it when they should not be. The complexity of drawdown and the way each individual will use it could cause problems for providers in the non-advised market.
For example, one person could be taking a high level income because they have other resources to fall back on, while another doing the same without those resources could risk running out of money.
Pennie says: “There are so many different factors that come into play. A lot of people don’t realise they are taking investment risk. Are they in a position to take drawdown? Unless the non-advised provider is capturing all that information, how can they send anything meaningful to their customers? If they do, will they send out something that starts looking like advice? One thing that will come out of this is that it is complex and, without advice, people will run the risk of running out of money.”
Indeed, firms that fall within the review sample should expect to face challenges.
Financial compliance specialist TCC technical director Colin Wilcox says: “The key challenges for those selected will be to demonstrate they are providing the right information, at the right time, and in a format that is likely to be understood by the consumer, so that they can make informed decisions on what to do with their pension assets.
“We’ve seen many firms wary of giving guidance or information to customers for fear of crossing the boundary into regulated advice and creating additional risk. If that risk is limiting the information these firms are providing, then there may well be a barrier to positive outcomes which isn’t helping customers make informed decisions. The FCA will also be keen to determine whether firms are straying into the regulated advice space.”
A different beast
The industry believes this review will be a different beast to the FCA’s one of non-advised annuities because the circumstances that prompted the investigation are different. The drawdown market has changed as a result of the new rules introduced by pension freedoms, whereas concerns about poor sales practices in relation to shopping around for annuities and information on enhanced annuities prompted two thematic reviews into the non-advised annuity market.
One thing that will come out of this is that it is complex and, without advice, people will run the risk of running out of money
Portafina managing director Jamie Smith-Thompson says: “With the non-advised annuity sales review it could be argued ‘questionable advice’ was being given that should not be allowed to continue.”
He says: “This review is about ensuring advice is available to the public and the need for it is made clear to those who would benefit from it.”
Just group communications director Stephen Lowe agrees. He says: “The FCA wants to ensure the right checks and balances are in place for non-advised drawdown sales. It’s about whether people know what they have bought. Has there been a sufficient duty of care from the provider? Have providers asked the right questions?”
Liberty Sipp managing director John Fox sees the regulator being keen to ensure the products launched by life companies to give broader access to drawdown since the freedoms are fit for purpose.
He says: “The FCA needs to make sure that people who would have gone into annuities aren’t just being flipped into drawdown or pushed down a particular path where an IFA isn’t involved, as that’s what happened with annuities.”
So what does the industry expect to come out of the review? One of the biggest things will be how complex drawdown is and how people who do not take advice could struggle with it. This could benefit advisers by highlighting the importance of advice.
Pennie says: “Most people should come out of drawdown at some point; it’s not a question of whether to buy an annuity but when. For some, annuities will be the right solution to mitigate longevity risk. But how many people think they will ever need to come out of drawdown? Without an adviser, they won’t be thinking about exit strategies.”
For Smith-Thompson, there is no doubt the case for mandatory financial guidance and support in relation to drawdown is real. However, he does not think people should be forced to seek advice.
He says: “As much as I believe that individuals should receive advice around drawdown, I think the FCA will struggle to enforce a blanket ban on the non-advised market.
How many people think they will ever need to come out of drawdown? Without an adviser, they will not be thinking about exit strategies
“Plainly, there are ethical issues to be taken into consideration, where many would say they should be able to use their money in whatever way they wish, and not be forced to consider advice. Also, there are individuals who are very financially experienced and would not need the additional input of an adviser.”
Many will agree with law firm Reed Smith partner Douglas Cherry, who says a good outcome will be the FCA listening to providers and engaging with them in a collaborative way.
He says: “Using the thematic review as a learning tool and to be instructive as to improvements that could be made, as opposed to a stick with which to beat firms – as can often be the case with these larger-scale reviews – would be one of the best outcomes for firms.”
Cherry hopes the FCA uses its findings to make changes going forward, rather than taking action against perceived previous non-compliance by applying the newer standards.
It is widely considered too soon for providers to prepare for the outcome of the review. But Cherry thinks they would be remiss not to start thinking about whether to set aside cash for potential redress costs.
He says: “It is very early to tell and the full parameters are not yet known, which makes it more difficult to predict what will or will not be required on this front.”