New Financial Conduct Authority rules to safeguard consumers when they are allowed to sell-on their annuities have been met with a mixed response by providers, with some saying the risk of mis-selling remained high.
In a consultation paper released today (21 April), on proposed rules and guidance for the secondary annuity market, the FCA stated it requires the annuity provider to check whether compulsory advice has been taken alongside the other checks they must make before facilitating a sale.
It followed reforms unveiled in December which will allow people drawing annuities to sell their contracts from 6 April 2017, extending pension changes announced in the Budget two years ago
Long-time critic of the plans Andy Bell, CEO of AJ Bell, said the new rules still raised double mis-selling risks, claiming those who have had a bad deal first time round may receive it again when they re-sell their annuity on the secondary market.
“We remain concerned that someone who has been ripped off once when buying an annuity could be ripped off again when they sell it,” he said.
But Steve Lowe, group communications director at Just Retirement Partnership, welcomed the stricter consumer protection rules on the incoming second-hand annuity market - and called for them to be applied to sales first-time around
“The FCA have found some teeth - they are insisting comparisons are presented to customers to show value for money - they don’t do that for the primary market,” he said.
He added in terms of providers administering such a system, this should not be too difficult.
“There may be some extra admin costs but it shouldn’t be too disproportionate,” he said.
A spokesperson for Standard Life said:“Customer needs evolve in retirement, so while an annuity may be the right product at one stage, it may not be at another. As such, we recognise the appeal of this initiative, provided there are adequate consumer protection measures in place.
“We will continue to engage with the government and the FCA on the secondary annuity market and will respond to their consultations in due course.”
Tom McPhail, head of retirement policy said this is a complex market to create from scratch, however we know that many annuity holders will be interested in trading in their income for a lump sum.
“The FCA has come up with a good package of measures to try and protect investors, while also giving them the freedom to manage their own money. All fees and transaction costs have to be disclosed up front, however they could easily absorb 10 per cent or more of the value of the annuity, so this may also put a lot of people off.
“Advice will be mandatory for investors selling an annuity above a threshold value, however the FCA has not yet determined what this value should be. This is perhaps indicative of the wide uncertainty over the size, shape costs and viability of this market. There is still a lot of work to do between now and next April.
For Steven Cameron, Aegon’s pensions director, selling an annuity comes with risks of consumers making choices in retirement they may later regret.
“The FCA sets out how it proposes to address numerous consumer protection considerations, but there are a number of missing pieces to make this brand new market work efficiently.
“There is no central point for consumers to offer up their annuity to a range of buyers, with consumers instead being encouraged to approach each buyer separately to get the best deal. Each potential buyer may demand their own medical evidence which will be timely and costly.
“And for annuity providers to be comfortable to allow a customer to assign their annuity to an unconnected third party, they’ll want a reliable way of knowing when the annuitant dies and annuity payments should stop, but at present this simply doesn’t exist.”
Daren O’Brien, director at London-based Aurora Financial Solutions said he welcomed the move to make insurers responsible for ensuring clients are getting advice, but as with the initial pension freedoms he is worried what caveats and guarantees they will now demand from independent financial advisers.
“The impact will be to create extra work for us even if we choose not to be involved as we will still have to plan why and how we deal with any enquiries and include these within our central investment process.
“We often sit waiting on phones to speak with providers and I can’t see them being any better within this market. It will simply add to the delays and costs for our clients.
“It’s a great idea that there won’t be commissions payable on these. Many clients will already have paid commission via the charges when implementing an annuity and so they should be added again for a reversal to sell the same annuity. IFAs should be charging fees anyway to their clients for any work recommended or otherwise.”
Paul Lindfield, director at Manchester-based Sedulo Wealth Management said that he welcomed the move to make providers responsible for ensuring advice is given pre-sale.
“It will potentially stop wholesale mis-selling by boiler house type firms as with the scams being generated through recent pensions freedom.”
He noted that it squarely puts the responsibility and liability on the advisers yet again.
“The annuity provider market has taken a bit of kicking with pensions freedoms, and so the blame and cost couldn’t possibly rest with them.
In terms of the ban on broker commission on annuity re-selling, he said there was no impact for IFAs who are fee and/or adviser charged remunerated.
“No hiding behind commissions or blurring the lines of impartiality because one provider pays more commission.
“But overall, I generally think that the second hand market is bad idea as people vastly under estimate their longevity, and ultimately I believe we will be looking back at what poor consumer outcomes were generated from this move.”
ruth.gillbe@ft.com
