Advisers share top three Consumer Duty 'significant harm' risks

Under the Financial Conduct Authority (FCA) Consumer Duty framework one of the key expectations placed on firms is to avoid causing foreseeable harm to clients.

Provider Aegon surveyed advisers to find out what they had discovered during their Consumer Duty compliance preparations.

Advisers cited erosion of spending power through inflation, running out of money sooner than expected and having insufficient savings to meet their needs as the top three ‘foreseeable harm' scenarios.

Aegon commented that retirement advice was one of the most complex areas of financial planning, with "technical complexity around pension and tax rules, as well as lots of uncertainty around future income requirements, investment returns, trends in inflation and client lifespan".

It added that with so many uncertainties, there "are many potential foreseeable harms, and it may be difficult to fully protect against all".

Other foreseeable harms flagged by advisers included making poor decisions on accessing benefits and being unable to find social care.

Aegon pensions director Steven Cameron said: "One of the most notable requirements in the FCA's new Consumer Duty is firms acting to avoid causing customers foreseeable harm, and this is very important as well as complex for retirement advice.

"Advisers see the most significant foreseeable harms facing clients as the reduction of spending power due to inflation, exhausting money sooner than expected, or having insufficient savings to meet needs. Each of these risks are based on uncertain future events."

He added: "It's hard to avoid or mitigate all foreseeable harms because some conflict with one another. For example, being too cautious in protecting against running out of money may mean clients take less income than they could, limiting their ability to enjoy the early years of retirement.

"So it's vital that advisers agree with clients which harms are most important to avoid, as well as documenting them all.

"As well as client circumstances and life expectancy, there is further uncertainty around the economic outlook. The number of potential harms and the way they can interact demonstrates the real value of advice at and in retirement."

Avoiding foreseeable harms in retirement

The provider said post-pensions freedom clients had huge flexibility on how to draw income - bringing huge benefits but also creating "many risks to manage", which it said in Consumer Duty language were "foreseeable harms".

Aegon commented that advisers played a key role in explaining options and risks to their clients "but have limited ability to remove them completely without predicting the future".

Similarly, is said that if a client reached retirement with insufficient funds to meet their needs, there was little an adviser can do to "change the past", especially if the client comes to them later in life, but "agreeing objectives and setting realistic expectations would help minimise the risk of running out of money".

"But without advice, there is major risk of future harm," the insurer warned. "This demonstrates how important retirement advice is to build a retirement plan that's sustainable, resilient and tax-efficient, helping clients to minimise or limit these harms."

Aegon's data came from its report in association with NextWealth - Managing Lifetime Wealth: retirement planning in the UK. The latest research was conducted in November and December 2022 with 221 financial advisers and 209 consumers of retirement advice.