An FSA undertaking has been issued for Royal London to amend contract terms relating to potentially unfair fee alterations and unlimited discretion in one of its products.
The changes come following an approach by Royal London to the FSA on clarification on how it could alter contract terms in one of its Scottish Life-branded products.
The FSA said the contract terms in the Scottish Life Capital Investment Bond may be considered unfair as they gave too much discretion to managers in changing the charge. A clause in the contract allowed the company actuary to determine by how much to vary the annual management charge, which the FSA said “gave the firm too broad a discretion”.
“[The clause] gave the firm the potential to vary the annual management charge at the firm’s actuary’s discretion, potentially without limit,” the undertaking stated.
Royal London has agreed to make changes to terms in the bond in relation to its annual management charge and discretion to change the contract.
Alasdair Buchanan, spokesman for Scottish Life, said the company is happy with the decision that came about from a collaborative process.
He said Scottish Life approached the FSA about three years ago to find out how the company could vary older contract terms that they wanted clarification about.
“It wasn’t an FSA investigation that started it off,” Mr Buchanan said. “We wanted to know what rights we had to change the terms and conditions. It’s one of those situations where the FSA and the provider are working together to get a good outcome for the consumer.”
The FSA determined the contract terms had the potential to cause significant imbalance to the detriment of the consumer and could be contrary to the good faith of dealing openly and fairly with consumers.
Royal London will also be changing terms that allowed it to impose an administration charge, again determined by the actuary, and apply it by cancelling units in the fund.
The new terms will apply to new customers; however, the product is being withdrawn at the end of the year. “For existing consumers, the firm has agreed to not rely upon the original terms in an unfair way and, for those to who the undertaking applies, to treat them as though they were subject to the new terms,” the FSA undertaking said.
In addition, terms relating to surrender gave Royal London the discretion to decide the minimum balance an investor must retain when making withdrawals. The terms will now be changed to have a minimum balance set in the contract.
The firm has also agreed to change its “special circumstances” clause which, in the view of the FSA, “gave the firm’s actuary complete discretion to make such variations to the contract as deemed appropriate, without any limit on the firm’s discretion”.
Mr Buchanan said customers would be informed of the changes in 2013, either directly or through their normal annual communications.