The Financial Conduct Authority has labelled further work on the annuity market as “complex but necessary” as it steps up its review into annuities consumer outcomes, citing “weaknesses” in the Association of British Insurers’ self-regulated code of conduct.
While the FCA said that it is aware the ABI has taken a “proactive lead” in improving transparency around annuities by introducing its code and through its consultation on annuity rate transparency, many industry figures have intimated this is likely to be insufficient.
The code came into force for ABI member firms at the beginning of March and requires them to provide “clear, timely information” for those approaching retirement by encouraging the customer to consider their options two years before retirement.
Insurers will no longer be able to provide “inertia” communications by simply sending an application form to a customer and must follow this initial communication with reminders six months and six weeks before retirement, detailing options such as combining small pots and shopping around.
The FCA said the code had widespread support, but that many had argued it does not go far enough and does not cover the whole market. The regulator said it will monitor the ABI’s work to assess whether it meets consumer needs.
The FCA has previously said it is undertaking its own review of annuities as it wants to estimate the financial losses consumers might suffer as a result of purchasing an annuity from their existing pension provider rather than using the open market option.
According to annuity providers, there is currently a 20 per cent difference in the best and worst rates, which can mean a drastic reduction in retirement income.
The FCA is also conducting a “high level assessment” of the profitability of new annuity business to understand whether profits in this market are high.
In July, the FCA issued information requests to annuity providers and it expects to report on its findings early next year. The regulator also intends to invite industry representatives and consumer organisations to participate in a roundtable on transparency on the annuity market.
The regulator said it wants to build a “comprehensive picture” of the market and to establish whether further regulatory interventions could help consumers make the most of their income in retirement.
It said: “We will feed back the initial results from the thematic review, and discuss what further work may be required from us or stakeholders, to ensure we are maximising the consumer experience.
“If this work does lead to new rules on firms, these would be developed in line with our policy framework. We would consult on the issue so stakeholders would have another opportunity to provide input.”