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FCA study of annuity selling highlights worrying failings

14 October, 2016

FCA finds clear evidence of annuity mis-selling to customers in poor health but process of investigation and redress is painfully slow

  • Seriously ill customers short-changed for the rest of their shortened life – need swift action
  • Tens of thousands in line for redress
  • At least one in three firms have failed customers and will have to compensate
  • FCA findings welcome but customers need urgent action not still more reviews

FCA findings from its investigation of whether annuity customers in poor health were treated fairly: The FCA has just released its findings following an investigation into how annuities have been sold. Link here https://www.fca.org.uk/publication/thematic-reviews/tr16-7.pdf . The results are further proof that the annuity selling process has failed customers.

Customers in poor health have been short-changed on their pension income for the rest of their shortened lives: In 2008, the FSA first reported that annuity companies were not treating customers in poor health fairly. Since then, companies were supposed to change their practices to ensure they treated customers fairly, but here we are, eight years on, and not enough has been done.

At least one in three annuity companies has been found guilty of serious failings: Seven firms were investigated and a ‘small number’ were found to have seriously failed customers and will be required to pay redress. If this ‘small number’ is two firms that still represents 30% of the firms. If it is three firms, that represents over 40% of the sample.

FCA is only just starting to look at others, but still not the whole market: On the basis of its findings so far, the FCA is now going to investigate some of the other providers. Of course it is good that this issue is receiving more attention, but we are already another two years on and it will still not be looking at all of them. Many of the smallest companies may have had the worst practices, yet their customers are not being helped at all. The FCA’s Report today will still not help all the customers who were sold inappropriate annuities in past years.

Study found ‘relatively high incidence’ of failure of process and breach of FCA rules: It is worrying that the FCA study found that most of the firms were not selling annuities properly. Such failures are of concern, even if the FCA concludes that people may not have suffered losses in the majority of cases. Given the huge numbers of people involved, even a small proportion of customers is a large number of people.

Tens of thousands already in line for redress but may be many more to come: The FCA indicates that its findings could mean at least 90,000 people will need compensation for wrongly sold annuities, but it is still investigating more firms and there is bound to be more redress due. This is taking many years. Urgent action is so important because the annuity market since 2008 has covered over three million people. Many of those worst impacted by any failure were in poor health and will have been living on much lower incomes than they are entitled to, some may have already died. At the moment, these annuities are completely irreversible so customers will be poorer for life if they receive no redress.

There were no proper suitability checks or requirements to ask about health: The way annuities have been sold, without any suitability or ‘know-your-customer’ checks, makes it inevitable that many people will not have had the chance to make best use of their hard-earned pension savings. Companies were not required to ask customers about their health. They did not have to tell customers that a standard annuity assumes they are in excellent health and will live longer than average. So customers often had no idea that if they had past health issues, such as heart trouble, high blood pressure and so on, they could have obtained higher income by buying a different type of annuity.

Just sending a leaflet is not enough to address customer detriment on annuities: The FCA only requires firms to send written communications i.e. an official leaflet that describes the different types of annuities, or something equivalent. But most people do not know anything about annuities. Most customers, who will only ever buy an annuity once in their life, have no idea what the words ‘enhanced’ or ‘impaired life’ annuities mean for them. The asymmetry of knowledge and power works against customer interests in this market more than most others.

Frustrating that it is taking so long for redress for those affected: It is very sad to see that so many years have already passed and redress is only just now being considered. And this will not apply to all customers, with other firms only just starting to be investigated. I would like to see much quicker action, given the importance of annuity income to pensioners in poor health

FCA must monitor how second line of defence is working for annuities sold since 2015: The requirement for most people to buy annuities was thankfully abolished in the 2014 Budget, but many people are still buying an annuity to secure a lifetime guaranteed income. The Government promised there would be better checks to protect annuity customers, and the FCA needs to investigate how this so-called ‘second line of defence’ is working in practice. The proportion of customers buying from their existing provider has been rising and that suggests there may still be a need to improve selling processes. In particular, the FCA needs to ensure customers who are not in excellent health do not just buy a standard annuity. Greater use of PensionWise free guidance would help give customers a better chance to buy the right product.

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