FCA targets tax revenue in £900bn unit-linked pension market

The Financial Conduct Authority has published the findings of a thematic review into the £900bn unit-linked pension market and has highlighted a number of “firm-specific” failings, including unfair distribution of revenues coming from tax or stock-lending activities.

Publishing the paper yesterday (10 October), the regulator said it had not found evidence of significant widespread failings or systemic risk, but that there were specific issues in individual firms which, if left unchecked, “could lead to customers being disadvantaged”.

Unit-linked funds are a type of pooled investment offered by insurance companies through life or pension policies. Over £900bn is invested in unit-linked funds, approximately 85 per cent of which is pension savings, according to FCA figures. The review covered 12 firms that offer unit-linked products.

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The FCA’s thematic review into the governance of unit-linked funds found “specific material problems” in individual firms. For example it found poor oversight of an outsource service provider, which could increase the risk of errors not being identified.

It also found insufficient controls over permitted assets, which could lead to investment in riskier assets than allowed, and overly-stretched operational capacity in a pricing team, which led to errors occurring and delays in rectifying them.

In these cases, the FCA required firms to appoint independent external experts to undertake a skilled persons review into whether customers have lost out and whether compensation is required.

The City watchdog also found other areas where firms need to make improvements to ensure that customers are treated fairly. These include fair allocation of tax and stock lending revenues between customers and shareholders, the identification and rectification of errors, and the management of potential conflicts of interest.

The FCA said the driver for the thematic review was to ensure firms were meeting its standards and treating customers fairly, considering the size and importance of the market.

As increasing numbers of employees are auto-enrolled into employer-arranged pension schemes the number of customers investing through unit-linked funds is expected to increase significantly, the FCA said.

Those firms that took part in the review were asked to make improvements and “much of this work has now been completed”, the FCA said.

The Association of British Insurers has a Guide of good practice for unit-linked funds and the FCA said it has now enhanced its guidance, by adding more detail, in light of its findings.

The FCA said: “This will make it clearer what good practice looks like and help introduce improvements across the whole of the unit-linked industry.”