In October last year, the Financial Conduct Authority (FCA) published a consultation paper on pension reform (CP 15/30) which identified a range of issues that affected regulated firms when dealing with consumers accessing their benefits under pension freedom.
In general, I agreed with the majority of the proposed rule amendments, shaped to ensure consumers are fully informed of their options when accessing their pension(s).
The paper also sought opinion on how regulation should be shaped in future, with particular focus on key areas such as insistent clients, pension transfers and non-advised annuities.
Following careful consideration from all respondents to the above, the FCA has now published its response in a policy statement.
I had hoped that by the time I wrote this article I would have been able to comment upon some firm regulatory guidance on the important areas listed above, but unfortunately, these will be subject to further reviews.
A number of these reviews are embedded within the Financial Advice Market Review (FAMR) and, therefore, the outcomes will not be decided as soon as I had hoped.
The majority of the final rules published directly impact pension providers, however, there are some amendments that effect advisory firms directly and these are confirmed here:
• With immediate effect, the requirement to issue a suitability report for income withdrawals is extended to include uncrystallised fund pension lump sums (UFPLS). This means any advice to take flexible payments will require issue of a suitability report. You can find templates for all types of pension reports, including UFPLS, within our library of suitability reports.
• Where a pension is subject to an attachment/earmarking order, it must be taken into account when providing advice. This means whenever advice is provided on pensions, and the client has existing arrangements in place, the question must be asked over the existence of an attachment order.
While the likelihood of a pension having this is remote, I would encourage you to update your fact-find documentation to include this question.
• The classification criteria for high net worth investors (HNWI) has been amended to exclude;
o lump sum pension withdrawals, unless where it is taken as regular income, for the purposes of the £100,000 net relevant income test and;
o cash released from a pension in respect of the £250,000 net investable assets calculation.
Other changes to be aware of, but which do not directly affect advisory firms, are:
• Application forms will not be permitted to be enclosed in the wake up packs. Also illustrations targeted to a specific product should not be issued, unless requested by the customer or where it is in relation to a small pot
• Where drawdown is entered into there will be no requirement to illustrate a future annuity
• Where there is a pattern of regular withdrawals, a projection of the sustainability of the income should be indicated (i.e. at what age this is likely to run out)
• Remove the need for bespoke risk warnings where a consumer wishes to access a pension pot of £10,000 or less and where there are no safeguarded benefits. This is linked to the 2nd line of defence and will require firms to provide general risk warnings only
• The future value of safeguarded benefits (guaranteed annuity rates) must be shown in projections.
There’s no doubt that there is still a great deal of key pension reform to follow and, frustratingly, we don’t yet have any indication of when the regulator might be approaching various areas covered by FAMR, let alone when it might be reaching conclusions and implementing changes.
However, policy review and change is not going to stand still and wait until FAMR is concluded, so please be as vigilant as ever when it comes to monitoring regulatory consultation and change.
Richard Nuttall is head of compliance policy SimplyBiz Group
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