PensionsDec 9 2013

Damning report demands FCA overhaul of non-advised sales

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Consumers are being mis-led by non-advised services that purport to be ‘free’, fail to disclose the lack of protection relative to full advice, and that lead to poor consumer outcomes due to the use of restricted or ‘tied’ panels, according to a hard-hitting report published today (9 December).

The Financial Services Consumer Panel published a report on the back of a year long study into the annuities market, which concludes consumers are generally “poorly placed to drive effective competition amongst providers and distributors” and face barriers preventing “full engagement”.

While the report finds that consumers are increasingly aware of the ‘open market option’ with more than half now shopping around before annuitising, it claims consumers are faced with a bewildering array of distribution options are that overly complex and that offer little clarity on charges or protection.

In particular it warns that there has been “a significant shift to non-advice in the mass market for annuities” partly driven by the Retail Distribution Review, and that this shift could “undermine the intentions of the RDR” by leaving customers with no choice but to use commission-based services.

According to the report, the continuing obfuscation of commissions by many of these services and lack of requirement to be ‘whole of market’ has led to some striking restricted panels deals with providers keen to “secure high-volume distribution” that pay 5 to 6 per cent commission, well above the 1.5 to 3 per cent average.

It recommends the Financial Conduct Authority undertake a complete overhaul of the non-advised market and implement a code of conduct that would force all distributors to offer full advice alongside their core service and remove mis-leading claims that the service is provided ‘free’.

The draft code of conduct states that all firms must:

• offer a regulated, fee-based advice service alongside their commission-based non-advised offering;

• be ‘whole of market’ and not tied to product provides either directly or through the use of panels;

• state clearly that the non-advised service is not free and charges a commission, and how this is taken from the fund;

• offer clear comparisons between the fees and commissions charged for advised and non-advised services;

• make clear that taking a non-advised service will limit consumer protection as the client will not have recourse to the Financial Ombudsman Service;

• accept all pot sizes, with a “caveat to allow commutation of very small pots”;

• use ‘deep underwriting’ to ensure that clients do not miss out on enhancements due to lifestyle or health impairments;

• ensure the system checks for pension contract terms such as guaranteed annuity rates or exit penalties; and

• offers clear information on alternatives to annuities.

It further demands that the FCA undertake a market study into the level of profits being taken by providers on ‘rollover’ annuities, ban ‘tied’ arrangements under its open market option definition and launch a probe into the operation of ‘introducers’.

In addition to the recommendations for the regulator, the report states that the government should seek to implement reforms that would allow those with multiple small pots worth more than £18,000 - the current limit for trivial commutation - to take their pension as a lump sum.

It also recommends the government introduce a ‘default annuity service’ similar to the role that the National Employment Savings Trust plays in the auto-enrolment market, and force all employers to offer a non-advised annuity service that adheres to the above code for their pension scheme members.

Finally, it recommends that the Money Advice Service should “fully develop its proposed annuity advisers directory and associated guidance, meeting high standards, and launch a targeted educational campaign”.

Sue Lewis, consumer panel chairman, said: “We are seeing a shift towards purchasing annuities via ‘non-advice’ routes, which means reduced consumer protection if things go wrong. The increase in non-advice sales appears to be driven by light touch regulation and higher profit margins, not consumer demand.

“We urgently need to reform this market, particularly for those with smaller pension pots, who usually can’t get independent advice. Our recommendations are intended to make choosing the right annuity more straightforward”.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “As the report identifies, much of the market innovation is led by intermediaries offering non-advised solutions and so it is vital they deliver good results for their customers. By giving them access to good quality shopping around services, the industry can show that it is putting customers’ interests first.”