So how are Pension Freedoms for you? There have been reports of hundreds of thousands of people calling for advice and information and views on Pension Wise are mixed. But there has been little focus on the new Conduct of Business Sourcebook (COBS) rules which require anyone in contact with a person considering their retirement options, to provide tailored risk warnings. These new rules have been parachuted into the regulations without consultation and can be found in COBS 19.
These rules reflect an on-going nervousness, on the part of the regulator, about the capability of the average person to make poor choices (their phrase, not mine). Indeed consumer behaviour, and specifically in relation to retirement choices, was one of the headline concerns in the FCA’s 2014/15 Risk Outlook (now incorporated into the Business Plan rather than a separate document).
In response to the perceived risk, that those considering their options in the run up to retirement will do themselves a mischief, the FCA has imposed a new Retirement Risk Warning requirement. This requirement took effect from 6 April 2015 and ought already to be part of your processes. The purpose of the rules is to ensure that anyone in contact with an adviser regarding their pension options receives warnings tailored to their personal choices, even when the client instructs the adviser on an execution only basis.
The warnings must be given “when the retail client has decided (in principle) to take one of the following actions (and before the action is concluded):
- buy a pension decumulation product; or
- vary their personal pension scheme, stakeholder pension scheme, FSAVC, retirement annuity contract or pension buy-out contract to enable the client to:
- access pension savings using a drawdown pension; or
- elect to make one-off, regular or ad-hoc payments out of uncrystallised funds; or
- receive a one-off, regular or ad-hoc payment out of uncrystallised funds; or
- access their pension savings using a drawdown pension.”
This could be a client calling for specific advice on accessing their pension savings or it could come up in a general conversation. In both cases, the requirement to give the warnings is triggered. A grey area (no pun intended) is where a client might want to change their pension strategy; altering drawdown income, for example. At first blush the rules appear to relate only to the period prior to accessing the pension savings, but best practice must be, particularly where that income is to be increased, to warn them of the potential pitfalls. This should apply even when the instructions are execution only.
But isn’t that advice?
No, the FCA’s guidance is quite clear that, even where the warnings are given in an execution only scenario, this will not constitute advice. However, this can only be insofar as the warnings are not related to the merits of using a particular product.
The first step in the new procedure is to ask the consumer, in every case; have you received financial advice (from an authorised entity) or received guidance from Pension Wise? If a client hasn’t received regulated advice or guidance from Pension Wise you must encourage them to do so. Your role at this point is to “help them understand that accessing their pension savings is an important, sometimes irreversible decision.” You should not take any further steps with the client until that message has been given.
So what are the Retirement Risk Warnings?
The second step in the new procedure is to ask relevant questions about how the client wants to access their pension savings. So far, so normal, except that this requirement is also relevant to execution only clients. This will catch providers when the client contacts them directly, the only exceptions being when an authorised adviser contacts the provider on behalf of a client or when a client has already received retirement risk warnings and those warnings remain appropriate.
The questions ought to establish whether any risk factors are present and, if they are, risk warnings much be given, clearly and prominently, in good time, with a record kept on file.
The risk factors are described as “the attributes, characteristics, external factors or other variables that increase the risk associated with a retail client’s decision to access their pension savings using a pension decumulation product;.”
The contents of the risk warnings themselves are not prescribed but guidance is given in COBS 19.7.12G as to the types of risk factors that firms should look for.
What happens if I don’t or I miss a warning?
Now that the rules have been enshrined within COBS, breach of them may result in action by the FCA or a legal claim for a breach of statutory duty by the client. Compliance with the rules is therefore imperative.
 Daily Mail 15 April 2015 ‘Pension companies swamped with 230,000 calls in four days as confusion reigns over new freedoms’
 COBS r19.7.7
 Para 3.23 Retirement reforms and the guidance guarantee: retirement risk warnings
 COBS r19.7.1