Schadenfreude over FCA ‘screw-up’ is misplaced

Internet boards were brimming with comments asking what would happen if a financial adviser had similarly screwed up. The FCA was described as a “reckless regulator” and a “shambles”.

The screw-up, you will recall, was the suggestion in an interview in the Daily Telegraph that charges on up to 30m policies over the past four decades could be looked at, and savers allowed to exit without being hit with punitive penalty fees.

As a result almost £3bn was wiped off the shares of major insurers, and the industry demanded an inquest into why a regulator should reveal such juicy titbits to a journalist.

Worst hit were Phoenix and Resolution which, at one point had lost 22.3 per cent and 13.7 per cent respectively. Legal & General, Aviva and Prudential also suffered falls as the sector took a pounding.

But while revelling in the FCA’s discomfiture, not one financial adviser seems to be concerned about the real question this story raised.

Clearly such a review and possible changes would affect the long-term profitability of the insurers and the company valuations. Surely advisers should be demanding to know how much excess profit these insurers are making out of their clients for their shares to be hit so dramatically.

It is worth recalling what Clive Adamson, the FCA’s director of supervision and a member of its executive committee, told the Telegraph’s Dan Hyde: “We want to find out how closed-book products are being serviced by insurance companies, as we are concerned insurers are allocating an unfair amount of overheads to historic funds.

“As firms cut prices and create new products, there is a danger that customers with older contracts are forgotten. We want to ensure they get a fair deal. As part of the review we will collect information to establish whether we need to intervene on exit charges.”

Nothing controversial there. In fact, this is something which should be welcomed by every financial adviser who is concerned about their clients’ financial welfare. Remember, we are talking about 30m policies here.

As I have said before, if an insurer cannot make a fair profit for 20, 30 or 40 years and still needs to charge high ongoing management fees and punitive exit fees, then there is something wrong with their business model.

Yet the importance of what Adamson was saying has been lost in the stampede to condemn him for the way he said it.

The insurers have played a canny game here. They got their independent review costing up to £3m, and continue to suck up profits on these old policies.

The insurers have played a canny game here

The FCA got a telling off. Like mugs, you have lapped it up. I hope you feel you have served your clients well here.

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Let us clarify pensions

When personal pensions were launched, the financial services industry had perhaps its darkest hour with widespread mis-selling to nurses, teachers and others in final salary schemes.

Now financial advisers and big insurers are battling to keep people in final salary schemes. But some fear that the temptation of taking cash spurred on by dubious pension-unlocking firms could lead many workers to make the worst financial decision of their lives.

John Reeve, senior consultant at Premier Pensions, hit the nail on the head when he warned that some workers do not understand their benefits, and may confuse them with annuities.

He is right to be concerned that defined benefit trustees may be seen as the bad boys by workers who try to transfer pensions and find the attempt blocked.

Education, strong regulation and more wise voices will be needed here to avoid people being stripped of their benefits.

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Care trouble

A relative told me she plans to give away or spend all her money bar £10,000 to avoid paying care fees in her old age. She is currently only 62 so this seems both premature and stupid. But it does highlight the extreme lengths to which some people are prepared to go to avoid care bills.

The NHS will not be able to take the strain off baby boomers’ care needs – and the insurance industry does not seem keen to help.

The pensions and older workers campaigner Ros Altmann suggests a care Isa which could be used only for such specific health needs as care for the saver or someone close to them. But with so many demands on cashflow, saving for a distant future that may never happen looks very unattractive.

I suspect at some stage we will be looking at more national insurance hypothecation, only this time with the money going directly to paying for care.