For UK financial advisers only, not approved for use by retail customers. Click here for the customer website.

Marrying Consumer Duty and client income

Vince Smith-Hughes
Director of Specialist Business Support
Pru UK

With the introduction of pension freedoms it is clear that many people have turned to drawdown as their retirement income vehicle of choice. Since the first announcement of pension freedoms, annuity sales are around a third of where they were, whilst income drawdown sales are around four times where they were.

Many of these customers will of course be advised. But what about the forthcoming Consumer Duty?  How will that affect income drawdown?  All regulated firms will need to consider these new rules in detail. As a brief reminder firms should have agreed implementation plans and oversight by 31st October, with most of the final rules coming into play from the end of July next year.

The new rules and guidance applies to all regulated firms. However for the purposes of this article I’ll concentrate on advice firms specifically.

So what does the consumer duty introduce? In short it requires firms to do the following:

  • act in good faith
  • avoid foreseeable harm, and
  • enable and support retail customers to pursue their financial objectives

Pretty much all advice firms would say that’s already business as usual, but let’s have a look specifically at drawdown clients.

No adviser can say categorically that a drawdown strategy is going to work 100%. Volatility over recent years caused by unpredictable events has shown us that.

So it naturally follows to avoid foreseeable harm the risks of drawdown need to be identified and a plan created to deal with them.

So what are the risks? This is not an exhaustive list but the key ones include:

  • Longevity risk
  • Inflation risk
  • Investment shortfall risk
  • Sequencing of return risk
  • Change in circumstances

These are all generally well known so I will not elaborate on these further. Many firm’s will have these included within a centralised retirement proposition (CRP) as risks, and also how these risks are managed.

There will be a requirement for a report to be produced and signed off by a firms board on an annual basis. The report would be an assessment of whether the firm is delivering good outcomes for its customers which are consistent with the Consumer Duty. This assessment should include:

  • The results of the monitoring that the firm has undertaken to assess whether their products and services are delivering expected outcomes in line with the Consumer Duty;
  • New and emerging risks to good outcomes for consumers;
  • Any evidence of poor outcomes and an evaluation of the impact and the root cause;
  • Actions taken to address any risks or issues; and
  • How the firm’s future business strategy is consistent with acting to deliver good outcomes under the Consumer Duty.

This assessment will be part of the evidence the FCA use to assess a firm’s compliance with the Consumer Duty and they will expect it to be provided on request.

So taking income drawdown as a snapshot, what could the part of the return look like concerning income drawdown customers? Let’s not forget a big part of the Consumer Duty is avoiding foreseeable harm. Looking back over recent years we can see that a constantly shifting investment market with some extreme volatility has occurred as well as significantly rising inflation. Although it is impossible to predict the occurrence of such events, we can identify the potential risks of these and also put a plan in place to deal with them.

It might look something like this, drawing information from the firms CRP and client management information (MI).  This is not supposed to be ‘all encompassing’ as many advisers will have additional strategies, plans etc in their CRP. However an analysis of the key risks, the plans for dealing with those risks and then an assessment of what was done to provide good customer outcomes feels like a good place to start. Once the ‘tactics’ have been established, it should be relatively straightforward to analyse what’s happened in practice to include as MI for the report.

Below is an example of the type of information an advice firm might produce based upon the identifiable risks of drawdown. This also doesn’t take account of wider MI which it would be prudent to consider, such as for example how many clients are falling outside of a firms initial and ongoing fee ranges, though this could be picked up separately as part of a wider piece concentrating on more macro issues.

CRP table – dealing with risks of drawdown


Drawdown = DD

Cashflow model = CM

Suitability report = SR

Key Risks How risk is assessed at outset  Strategy (ies) for  dealing with risk  Flag to identify risk crystallising/potentially crystallising Strategy (ies) for dealing if risk crystallises (as prepared and planned for and identified under SR)

Longevity risk

CM to include longevity  modelling based upon market data SR to highlight need for regular reviews using CM Annual review with CM to show risk of fund exhaustion using current market data

Reduce income

Consider purchase of annuity

Take money from cash buffer outside of portfolio

Inflation risk CM to include multiple projections of future growth and suitably stress tested

Use of bucket system to target when funds should be drawn on

Use of multi asset fund to help ensure consistency of return

Adjustment made to income based upon stress tested model reflecting current market experience

Funds underachieving target growth rate for defined period of time CM at review to identify reduced income level, which may need to be supplemented by available funds outside of DD
Sequencing of return risk CM to include potential for market falls

SR to include cash buffer held within portfolio to take income from over short term

SR to identify any sources of funds that could be used to draw income from in short term

SR to include recommendation for fund/part of fund to be invested via smoothed fund to reduce fund volatility

SR to include recommendation for natural income to provide all/part client income

Use of bucket strategy to reduce volatility from fund paying income

Evaluation of fund’s sequencing risk profile

Market falls by a predetermined amount

Volatility of portfolio exceeds expected  boundary

Conduct client review immediately with updated CM

Take money from cash buffer in portfolio

Take money from cash buffer outside of DD

Change in circumstances Any future changes to be notified by client Client contact or identified at review time or client contact in interim Revised CM to determine effect of new requirement (for example lump sum taken or increased income requirement) Determined by new need or objective


Having established and identified where the key risks lay, the data can then be collated to provide information for the annual report Collection of clients in drawdown MI for the firm’s  annual assessment report. Below is an example of some of the information this could contain.


Number of clients in drawdown Number of clients where client objectives not met as per SR Reason(s) for client objectives not being met  How remedied and any change required to CRP? Number of clients where risk highlighted in CRP/SR crystallised Number of clients where strategy in CRP/SR was used Number of client complaints received for drawdown clients Reason(s) for complaint How complaint dealt with
xxx xxx xxx xxx xxx xxx xxx xxx xxx


Most advice firms will already have robust processes in place to deal with the risks a client may face, in order to ensure they have good understanding and achieve a good outcome. The challenge going forward will be how to marry these processes with the Consumer Duty, whilst also capturing and presenting the relevant MI under the new rules and guidance.

Given the relatively short timescale to implementation of the new rules and guidance, now is a good time to start thinking through the necessary processes and collation of data.