I predict a RIAAT on retirement income advice – 2025 supervisory and enforcement risks for investment advisers

This is the second blog in a four-part series covering key supervisory and enforcement risks for investment advisers in 2025.

The FCA appears to be increasing its focus on investment advisers. Last year’s retirement income advice thematic review by the FCA was perhaps the most in-depth example of this. Whether this comes into the crosshairs of future supervisory and enforcement work by the FCA remains to be seen, but there is a real risk that it could. 

Why? One possible answer is that are significant similarities between the way the FCA has so far dealt with the thematic review and the FCA’s actions leading up to taking enforcement action in the DB pension transfer market. 

The review looked at advice provided by firms to customers in decumulation (i.e. where pensions or other savings are accessed for income). The FCA identified a number of areas of poor practice and required firms to improve. The FCA has said that retirement income advice will be “an ongoing focus for us”. It will follow up with firms on its findings, carry out supervisory work and, importantly, “take further action if firms do not address the areas of poor practice highlighted by the review”. 

A year on from the review findings’ publication, we might see further activity in this space, especially as the FCA winds down its work on DB pensions. That’s why it’s important to take stock at this point and consider what, if any parallels between the two areas may be drawn to mitigate risk.

Areas of poor practice

There is overlap between practices found in the DB pension transfer market and the examples of poor practice that the FCA identified in its thematic review. The latter highlighted:

• Advice suitability: Firms not completing fact-finding exercises to the required standard, leading to deficiencies with the information held for customers. This could result in firms giving unsuitable advice and providing recommendations to customers that do not align with their retirement income needs.

• Income withdrawal strategy / methodology: Not all firms were considering sustainability of income withdrawal effectively. This was because many firms were not using cashflow modelling properly or at all. This meant that consumers risked making poor decisions about how and when to withdraw funds sustainably.

• Risk profiling: While firms assessed the customer’s attitude to risk, some did not assess the customer’s capacity for loss. This could result in customers taking on too much risk and not being able to withstand reductions to their income. 

• Control framework issues: Some firms adopted inadequate recordkeeping and retrieval processes. Others provided an incomplete advice register to the FCA and more than half of firms held inadequate management information. Firms’ systems and controls were therefore not robust, meaning firms may not be able to manage their businesses or respond to FCA information requests.

Getting suitability of advice RIAAT

The FCA’s publications have a similar look and feel to those published for the DB pension transfer market. For example, alongside the thematic review, the FCA issued its Retirement Income Advice Assessment Tool (RIAAT). There are shared hallmarks between this and the Defined Benefit Advice Assessment Tool (DBAAT) in how they set out the steps the FCA considers firms should take to determine advice suitability.

The FCA has recommended firms use the RIAAT to assess past advice, whether the firm is assessing a complaint or carrying out a past business review. 

A third of the files the FCA reviewed either indicated that unsuitable advice had been given or firms had not gained the necessary information to assess suitability. However, the dataset the FCA used as part of its analysis in the DB pension transfer market was much broader than that on which it has based its findings in this thematic review.  

What should firms be doing?

Alongside the thematic review, the FCA issued a Dear CEO letter. The letter highlights the key areas of improvement in firms’ practices identified by the FCA. It asks CEOs to take steps to address the review’s findings within their firms. The letter makes clear that the FCA will follow up on findings with firms and carry out further supervisory work.

Firms should therefore continue to consider whether their business practices align with the examples of good practice the FCA highlights. If not, and examples of poor practice identified by the FCA exist within the firm’s business, the firm needs to take steps to remediate its practices. 

Given the FCA’s ‘recommendation’ to review retirement income advice using the RIAAT, giving serious consideration to doing so must be a priority for firms. In practice, this will mean an appropriate governance forum – potentially the board – considering the use of the RIAAT to assess advice, and keeping a record of this discussion and, if the firm chooses not to use the RIAAT, a record of the reasons for not doing so. Firms may be able to take comfort from other work undertaken to satisfy themselves they have met the requirements. If issues are identified, firms have the opportunity to take proactive steps to investigate issues and, where appropriate, redress customers. Recent FCA Final Notices and FCA commentary demonstrate the importance of proactive remediation, particularly if the firm ends up in enforcement . Firms should also keep in mind their regulatory reporting obligations under Principle 11.

Where firms find weaknesses in historic advice, a plan for remediation should be established. The FCA will expect someone at a senior level to take responsibility for this project and that the board receives MI that allows it to assure itself that the remediation has been completed.

The volume of material published by the FCA indicates a clear message to the retirement income advice industry: you have been warned. Where firms do not take heed of this information, the FCA could deploy its supervisory powers or go beyond these and bring enforcement action.

With the FCA’s supervisory and enforcement action in the DB pension transfer advice space slowing, could that be replaced by retirement income advice?

If you would like to speak to one of our experts about the above, please get in touch.