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FCA to probe retirement advice suitability after pension reforms

Written by: Scott Sinclair
The Financial Conduct Authority (FCA) is to review the suitability of retirement advice following the pension ‘freedoms' set to be introduced next month.

Publishing its 2015-2016 business plan, the regulator said it will look into both advised and non-advised purchases of retirement products in early 2016, once the reforms have had time to bed in.

The sales practices of pension providers will also be scrutinised, to see if there has been improvement since the FCA’s review into annuity sales last year.

Additionally, the FCA said it will assess firms’ practices following the publication of guidance on inducements and conflicts of interest in retail investment advice, and undertake a market study into non-advised sales of investment and protection products.

The regulator uses its annual business plan to set out its objectives and priorities for the coming financial year.

A key focus in the next 12 months will be the impact of the pension changes announced at Budget 2014, which gave savers greater powers over how they can access and spend their retirement funds.

The reforms, many of which are set to be introduced on 6 April, effectively removed the need for retirees to purchase an annuity.

The FCA said that the proliferation of new, complex retirement products could pose a threat to older consumers who have little experience making decisions about their income and who typically underestimate their longevity.

“Firms may develop decumulation products or services that could highlight certain product features or the price at the expense of other important information, or be difficult to compare due to hidden costs and fees and include barriers to exiting,” the regulator’s business plan reads.

“There is also a risk that these could result in increasingly complex products or a mix of products that require ongoing servicing and potentially higher costs, which some financial advisers may recommend in a bid to generate higher fees.”

Care costs and advice are also a concern, it added. “Consumers may… be ill-prepared for the cost of long-term care due to a lack in savings combined with a context of low returns on savings, or decisions made about the early withdrawal of their funds. Financial firms may seek to fill this gap with innovative products that provide finance for long-term care in old age.

“However, long-term care is usually a distress purchase and unsuitable advice or unfair pricing could lead to significant detriment for the customer.”

Division split

Meanwhile, the FCA has set out details of the two divisions that will undertake its supervisory and authorisations work, as part of the new FCA strategy announced in December 2014.

Its Supervision Investment, Wholesale and Specialists division will be led by Tracey McDermott, while Linda Woodall will head up the Retail and Authorisations division as acting director.

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