©UFS FCA Drawdown Thematic Review Andrew Carlisle FPFS AIFP Chartered Financial Planner

Committed to supporting you… In response to limited support materials within the public domain on a key FCA topic Capacity for Loss, we developed materials to support you in your conversations with clients. Articulating your value and the value of advice in the post RDR world is key, so we’ve developed a ‘Guide to financial advice and unit-linked guarantees’ 2

Agenda Overview Common Failings Systems and Controls Demonstrating Suitability Research Paradigm Support Summary 3

Overview High Risk Area and always on the FCA radar Always first cases to be reviewed on an FCA visit No1 FCA concern is that NO systems and controls put in place to ensure suitable advice given in many cases 4

Overview - Building Concerns FSA review in 2011/12 was started due to concerns Market fluctuations HMRC changes in legislation MI from Adviser visits suggested poor quality of advice / documentation in this area Complaints management companies shifting to the area of annuities and drawdown Questionnaire to 300 firms Advice trends Client contact Systems and controls (T&C – File reviews) 5

Common Failings Suitable 36% Unsuitable 18% Unclear 46% Failed systems and controls Lack of information to demonstrate suitability Lack of Research Poor Suitability Report File review of 160 files carried out during review

Failed Systems and Controls No documented advice process for advisers to follow No or inadequate business reviews following HMRC changes Lack of quality checking of advice Poor monitoring of quality checking Management information not integrated 7

Systems and Controls Management Information New business register – Board minutes – client feedback File review results – Complaints – Persistency – T&C File reviews Risk based approach – Checker is competent – Report produced Training and Competence Professionalism requirements CPD – File Checks – Customer feedback – observations Testing of technical knowledge – Role plays – 1to1`s Focus on higher risk or non regular business 8

Lack of Information to demonstrate suitability Insufficient or incorrect disclosure documentation Insufficient or missing client objectives Insufficient evidence to show why TFC and / or Income is required Insufficient evidence to show why the amount of TFC and / or income is required Insufficient evidence to show how client ATR / CFL has been arrived at 9

Assessing ATR – The Five Pillars Risk Profiling(Assessment) *1 Risk descriptions(Description) *2 Other Factors i.e. Term / CFL(Discussion) Asset Allocation Investment Selection *1 Tool is the guide not the answer *2 Must - Quantify Risk > Use consistently > Be Objective > Define Category > Avoid Jargon > Be balanced

And now introducing Critical Yield ATR=Risk Willing to take CFL= Risk Able to take CY= Risk Needs to take 11

George Kinder’s famous three questions: Question 1: "Imagine you are financially secure, that you have all the money in the world. How would you live your life? Would you change anything? Let yourself go. Don’t hold back. Describe a life that is complete for you." Question 2: "Now imagine that you visit your doctor, who tells you that you have only years to live. You won’t ever feel sick, but you will have no notice of the moment of your death. What will you do in the time you have remaining? Will you change your life and how will you do it?" (Note that this question does not assume unlimited funds.) Question 3: "Finally, imagine that your doctor shocks you with the news that you only have 24 hours to live. Ask yourself: What did you miss? Who did you not get to be? What did you not get to do?" 12

Lack of Research Existing product rarely considered Did not demonstrate why new product required Benefits of new product not clearly demonstrated Increased costs not justified Lack of discussion and / or discounting of other relevant post retirement options Moving of multiple pension funds just to justify a minimum into drawdown product or advice minima FCA expects advisers to discount drawdown when advising on an annuity 13

Suitability Reports Many reports not personalised Did not state other options that were discounted Did not clearly set out the review process Advice cost not clear on £ 14

Demonstrating Suitability – Systems and Processes Documented advice process for advisers to follow Audits of your business Quality checking of advice (pre-approval) Monitoring of quality checking Management Information Training and Competence 15

Demonstrating Suitability – Client File Advice Process / File Checklist Disclosure Fact Find – Know Your Client Info ATR / CFL Assessment Income Requirements (How much and why) TFC Requirements (How much and why) Suitability Report Research Client Reviews 16

Demonstrating Suitability – Research Why Move Other Post Retirement Options Any loss of benefits If Applicable. Why is a SIPP required Comparison of Existing Provider vs New Provider Who to move to Charges Performance Availability of appropriate funds Financial Strength Administration 17

Demonstrating Suitability – Suitability Reports Evidence of the clients needs and objectives Why new product / provider and why existing plan has been discounted Comparison of all other relevant post retirement options Confirmation as to why level of TFC is required Confirmation as to why level of Income is required ATR / CFL / growth rate required Taxation / Critical Yields / Death Benefits etc Cost of advice in £ 18

Example Checking sheet part 1 Are all key documents there Clients personal details (Age Health Retirement Objectives etc) Details of existing arrangement (Charges Drawdown facility) Has client ATR / CFL been assessed Has drawdown been recommended and if so why Does client require TFC? If so, how much and why? Does client require income? If so, how much and why? 19 Only have to discount RELEVANT options for the client Client can take TFC because it is tax advantageous to do so

Example Checking sheet part 2 Has an assessment of outgoings taken place What other options have been explored and why discounted Was the GAD rate review process mentioned in the suitability report Was there a commitment to review the product Was the contract and the risks associated with it clearly explained to the client Was their evidence that the advice was checked by the firm 20

Paradigm Support Dedicated File Review Staff File Review Checklists Compliance Manual Access to PPOL To support you in protecting your business 21

Summary Income Drawdown can be extremely useful strategy for the right client Consider TFC / Income requirement Consider and discount all other relevant post retirement options Ensure systems and controls are effective and regularly reviewed Highly personalise suitability reports No client objectives confirmed will equal “unclear advice” Must help client make an informed decision 22

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