The FCA is investigating whether consumers can understand the outcomes of stochastic cashflow modelling as part of its shake up of DB transfer advice.

The regulator is asking advice professionals for their views on the subject.

Officials have posed questions around this as part of its consultation on changes to guidance on DB transfer advice.

The FCA report stated: “We know that a number of advisers use stochastic Financial Planning software for future cashflow modelling and to demonstrate the uncertainties of investment and mortality.

“We have considered carefully whether an appropriate analysis which includes the potential outcomes from the proposed receiving scheme could be undertaken on a stochastic basis and easily communicated to the client.”

The FCA report read: “We are interested to receive firms’ views on reconciling stochastic cashflow modelling and appropriate pension transfer analysis more broadly with other mandated projections in the transfer advice process.

“In particular, we welcome robust evidence on consumers’ ability to understand the outcomes of stochastic modelling.

“We also welcome views on whether there is a need to moderate the outcomes from stochastic modelling so that they could be more easily aligned and compared to a deterministic projection undertaken at the intermediate growth rate.

“For example, immediately prior to the introduction of the current COBS rules, FSA rules required the median result for a stochastic projection not to exceed a deterministic projection allowing for the intermediate rates of return and inflation.”

FCA officials stated that its preference is that the role played by the proposed receiving scheme is “communicated to the client in the advice as consistently as possible with the KFI (Key Features Illustration)”.

This will be provided to the client if a transfer was to proceed, it said.

The report stated: “This does not prevent firms from using stochastic software for holistic Financial Planning but it does require that where the focus is on one receiving scheme, the advice can be justified to the client by reference to a deterministic analysis which is consistent with a KFI, where relevant.”

The consultation posed the following questions:

What are your views on the use of stochastic tools within appropriate pension transfer analysis?

How could the outcomes be presented in a way which results in good consumer understanding, given the format and outcomes presented in other mandated documents?

The FCA is asking for comments by 21 September 2017 by Email: This email address is being protected from spambots. You need JavaScript enabled to view it. or in writing to:

Emily Pinkerton and David Berenbaum
Strategy and Competition Division
Financial Conduct Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
Annex 1