The Financial Conduct Authority is considering restricting commission on non-advised sales of annuities or even banning non-advised sales after discovering it would be less expensive to take advice than to get your annuity straight from the provider.
In a 139-page consultation paper on the pension freedoms, published today (1 October), the watchdog said it is looking at ways to tackle the fees annuity providers tack on to non-advised sales.
The regulator raised serious concerns that consumers who opted for non-advised annuities were worse off financially, lacked the benefit of receiving a personal recommendation and had left themselves with no chance of redress if the product failed to deliver what they expected.
The FCA stated it was also considering restricting commission on non-advised sales of annuities but admitted limiting any ban to annuities could distort competition between these potentially substitutable products.
Firms might as a consequence be incentivised to promote drawdown over annuities with potential harmful impacts on consumers in the long term, the FCA noted.
The FCA also stated it was considering as an alternative to banning commission a cap on commission levels.
While this might address the potential for bias and the relative cost to the consumer, the FCA stated it may have unintended consequences for competition, since firms may price up to the maximum level of the cap.
Also in the consultation paper, the FCA suggested “another more extreme option” would be to consider banning non-advised sales of annuities altogether, if non-advised sales are more expensive than advised sales and consumer outcomes are better with advice.
However the FCA added it is not at all clear that such an intervention would be warranted, or that the potentially significant increase in demand for advice from those consumers wanting to buy an annuity would be appropriately met.
The regulator stated it is not proposing any handbook rules at this stage but is asking for views on the issues identified and the policy options for dealing with them.
Any decisions will also play into the Financial Advice Market Review, the watchdog added.
Data from the Association of British Insurers (ABI) shows around 189,000 annuity contracts were written in 2014. Of these, 132,000 were sold without advice.
Based on value data, the FCA stated fewer than 20 per cent of non-advised annuity contracts written in 2014 were introduced by third-party distributors.
According to research by the Financial Services Consumer Panel and evidence the FCA saw during the course of the market study, commission rates for a standard annuity are 1 per cent to 1.5 per cent and 2.5 per cent to 3 per cent for enhanced annuities.
For the average size of pot used to purchase an annuity (around £34,000), this is equivalent to £330 to £990. This assumed that the annuity rate offered on a non-advised only basis incorporates the broker commission.
The FCA stated it was considering collecting more comprehensive information regarding industry levels of commission rates on non-advised sales to allow a full assessment of the scale of these issues.
The regulator stated it will also look into how the outcomes for consumers with different sized pots since the costs may depend on the size of the pension pot the consumer has, particularly if an adviser charges a fixed sum for their advice.
In that situation the FCA stated consumers with small pension pots would likely still pay less for a non-advised, commission funded, sale than for a sale with advice.
By way of illustrating this point, the FCA pointed out given that 50 per cent maturing pension pots are valued at less than £20,000, commission rates would need to exceed 3.75 per cent to outstrip an adviser charge of for example £750.
The consultation closes at the end of this month, with final policy to be published in the second quarter of next year.
emma.hughes@ft.com
