From Ros Altmann:economist and pensions,
    investment and retirement policy expert

  • pensionsandsavings.com

    FCA Review

    FCA Review

    14 February 2014

    • FCA Review is welcome but customers need urgent action not another review
    • More delays mean more consumer detriment as companies sell unsuitable annuities to customers who do not understand the complex issues and jargon
    • Need suitability checks and ban commission for all annuity sales to remove bias against advice

    The FCA’s Thematic Review of Annuities is certainly welcome.  Its findings that the market is not working well are hardly a surprise, given the extent of media coverage in recent months and years but it is encouraging that many of the problems are finally receiving regulatory attention. 

    Just launching another review leaves more customers at risk:  The FCA has powers to protect consumers properly, but it is launching another review rather than acting immediately.  The reason why immediate action is so important is that this market affects so many people and the transactions they are making are irreversible.  More than 1000 people every week are buying annuities and the market is worth £14billion each year.

    Those in poorest health and those with lowest savings are most at risk, yet the Regulator is still not taking action:  The FCA is right to highlight that consumers in poor health and those with the smallest funds are suffering the worst detriment, but no action is being taken to stop this yet. If the FCA knows that many companies do not offer annuities suitable for people in poor health, why does it not ban them from selling a standard annuity to such customers?  Why not introduce compulsory questions to ask about health? 

    Why are there no suitability checks before selling this irreversible product?:  The way annuities are sold, without any suitability or ‘know-your-customer’ checks, makes it inevitable that many people will not have the chance to make best use of their hard-earned pension savings.  The insurance industry has had years to get this right, but so far the pace of change has been glacial.  Meanwhile, millions of pensioners may be poorer for the rest of their lives, as they have bought annuities that are not right for them, and will never be able to change them.

    The market failure is about more than lack of ‘shopping around’ for better rates:  The tone of the FCA review is that if only people would shop around for a better rate than their existing provider can offer, all the problems would be solved.  This is simply not the case.  There are so many problems in this market and the failure to find best rates is only one of them. 

    Other serious failings:  The lack of disclosure of hidden charges, the lack of requirements to ensure the annuity product is suitable for a customer, the ongoing failure to ensure customers are written to in plain English and understand the jargon being used, the regulatory bias against financial advice which has allowed non-advised services to charge commissions that can be higher than the cost of full advice without clearly disclosing these to customers before the point of purchase are all damaging to customers.  They ideally need advice to help them understand the complexities of this decision and the asymmetry of knowledge and power works against customer interests in this market more than most others. 

    Report indicates customers are at fault:  The Report seems to suggest that the lack of engagement with the open market option is a failing of customers, rather than a failure of the sales process and the market itself.  The Report suggests that customers ‘lack confidence’ to switch to a new provider, that they do not ‘fully understand’ the decisions they need to make and that they suffer from inertia.  In reality, however, insurance companies often make it impenetrably difficult to move to another company.  Reams of paperwork, full of jargon means most ordinary people have no hope of really understanding the complexities of annuities, buying from their existing provider is far faster, easier and saves much form-filling and chasing up of information and many people try to switch but end up giving up because they need the money quickly and the process is so time-consuming or difficult.  If the FCA were to require a proper and standardised process for decisions at retirement, and encourage people to use the money they will automatically pay when they buy an annuity to actually pay for advice, then customers would have a much fairer chance of doing the right thing.

    Do FCA objectives conflict and will customers’ interests be prioritised?:  It is telling that the FCA states its objective is to secure an ‘appropriate’ degree of protection for consumers but also to protect the integrity of financial firms.  There is a conflict between these two objectives.  As so many financial firms are involved in selling annuities and making profits from those sales, the need for consumer protection could jeopardise some of those business models.

    Treating Customers Fairly is about far more than shopping around – need right product first:  The FCA says it will ‘consider very carefully whether changes to its investment rule book are needed to create a market that treats its customers better’.  TCF is about much more than just shopping around for a better rate – it’s got to be about finding the right product first and whether any product is needed at all.  The study was only to assess the difference in income between shopping around or not shopping around, rather than considering whether customers are being sold an unsuitable product.

    Findings on broking websites are welcome, but don’t mention commission bias against advice:  I am pleased the FCA mentions that broking sites must prominently disclose the costs, but it fails to mention the commission bias against advice which makes non-advice far more profitable than advice.  Even more worrying, the FCA seems to believe that using broking websites ‘allow people to buy an annuity direct, which can save money by foregoing professional financial advice’.  This is actually not necessarily true.   The FCAs own RDR rules allow the sites to charge commission, with no controls on those charges, which can result in customers paying more for non-advice than for full advice.  There needs to be proper acknowledgement of the value to customers of taking individual advice before buying this irreversible product, rather than trying to go it alone without any protection at all. Even more worrying is that the FCA found these websites, which can charge more than using an IFA, were misleading and did not describe annuities properly.  This is such an important financial decision and so much money is at stake that proper regulatory scrutiny is vital.

    What reforms are needed:  The FCA’s investigation needs to focus on more than just identifying why people are not ‘shopping around’ and preventing existing providers from selling to captive customers.  It needs to include consideration of how to help people understand their options properly, including doing nothing for the moment if they do not need extra income immediately and making sure they know what kind of product they should be ‘shopping around for’.  Getting a better rate for an unsuitable product is not good enough.  People need to know what product they need first.  Reforms that are required urgently, which would actually help customers properly, include:

    1. Ensure annuities are no longer sold as a no-risk product that is suitable for all – buying an annuity is a ‘risky’ decision and customers need warnings to understand all the risks before making this irreversible purchase
    2. Require all annuity providers to treat customers fairly – which means mandatory suitability and know your customer checks (including checking for health issues, trivial commutation and whether to cover a partner)
    3. Reform the Conduct of Business Rules so that pension providers do not automatically offer annuities to all those reaching pension age – customers should have to decide what is best and find help or advice for this
    4. Introduce standard forms and paperwork that enable customers to understand all their options – including taking all as cash, or doing nothing for now.  Make sure the forms are tested on customers to ensure they meet a ‘plain English’ test
    5. Ban commission on the sale of annuities by any party, not just IFAs and do not permit non-advice services to hide their costs until the point or purchase while advertising ‘free’ services.  All costs should be disclosed up front in order to remove current bias against individual financial advice
    6. Investigate annuity pricing to identify any excessive profitability and investigate why some companies offer such poor rates and consider the issue of small pots urgently since there is no real competition in this area of the market.

    A fuller background briefing on annuities is here, if you want more detail on what has gone wrong.  http://bit.ly/1kBoI5A


    2 thoughts on “FCA Review

    1. Will you be asking questions of the major insurer you are on the payroll of why they are not doing enough to help consumers explore their retirement options?

      1. I am not on the payroll of an insurer. I am an independent commentator who wants to help the market work better for customers.

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