Who would be a life company right now?
The Telegraph’s revelations that the Financial Conduct Authority is set to launch one of the largest investigations in recent memory into some 30m sales of pensions, endowments, investment bonds and life insurance policies since the 1970s has sent renewed shock waves through markets.
As at 1.30pm this afternoon closed life consolidator Phoenix Group and Resolution, owner of Friends Life, were reeling from a fresh sell-off that left them down 20 per cent and 15 per cent down respectively for the day, wiping a collective £938m in value from the shares.
Elsewhere, Aviva and Legal and General were down 8 per cent and Standard Life and Prudential were down 4 per cent. St James’s Place was also down 3 per cent.
FCA director of supervision Clive Adamson told the paper the regulator is investigating the level of profits made by insurers from funds closed to new business.
Many policies also include a significant exit fee which can cut a policy’s value in half if the saver tries to switch to another provider. These fees could be banned by the FCA if it decides that would be an effective way to ensure better treatment for savers, the paper claimed.
Full details of the probe are set to be announced in the regulator’s annual report, due to be published on Monday.
This is the second time in 10 days that listed life companies have taken a battering following last week’s Budget announcement, which left the sector down £4bn in a single day as predictions abounded of a 90 per cent drop in single annuity sales.
The latest turmoil also followed hot on the heels of the announcement by the government yesterday (27 March) that it is going ahead with a plan to cap charges for providers of auto-enrolment pensions at 0.75 per cent.
The cap, set at the lowest of the three options outlined in the consultation, will “transfer” £200m in profits for life offices “to the pockets of savers”, pensions minister Steve Webb said.
Crucially, while the charge cap does not exclude contribution charges such as those levied by National Employment Savings Trust, the calculations used in the consultation response place the government’s default scheme provider well inside the maximum threshold.
Worryingly for providers, Mr Webb added that the government will revisit the cap in 2017 and that it sees 0.75 per cent as “merely a starting point”.
FCA response
After a first draft of this blog was published, the FCA released a statement on the “long-standing insurance policies” review.
It clarified that it “will be reviewing a representative sample of firms” and is “not planning to individually review 30m” policies - and also that it is not intending “to look at removing exit fees from those policies providing they were compliant at the time”.
The statement added: “This is not a review of the sales practices for these legacy customers and we are not looking at applying current standards retrospectively – for example on exit charges.
“This work will commence in the summer and we will be speaking to firms about how we can undertake that review.”
Life companies began to pare losses in the wake of the FCA statement, which should calm fears over the costs that could eventuate from the review.
Bleak results for Lighthouse
Elsewhere this week, Lighthouse announced results which confirmed another year of losses for the national advice firm and network, as a past business review heaped another £310,000 worth of redress provision on top of a big bill previously set aside for Arch Cru compensation.
The biggest contributor to the poor performance was a drop in adviser headcount post-Retail Distribution Review of 17 per cent and restructuring costs of £1.4m, while it has pinned future hopes on continuing improvements in adviser productivity.
Sesame FAS fallout
Network rival Sesame, which also recently confirmed large losses and is similarly racking up large redress bills, was also back in the news this week over its admission that the Financial Conduct Authority’s incentives crackdown could require it to close its Financial Adviser School.
The initiative was launched in 2011 but executive chairman John Cowan said it was under threat as a result of the crackdown because it is funded by provider sponsorship.
He said: “We believe it’s a terrific service and it’s currently ongoing, but as it falls within the remit of the inducement rules we will have to re-evaluate it.”
TPL turmoil
One of the biggest stories this week was the lead story for our sister paper Financial Adviser on IFA Martin Bamford’s revelations that the elderly parents of a client were advised to borrow £750,000 against their home to invest in a single fund based on a portfolio of life settlements bonds.
The managing director of Surrey-based Informed Choice said he was “shocked” when a client told him her parents, who do not wish to be named, had been advised in 2007 by another adviser to borrow £250,000 against their property and another £500,000 for leverage to invest in a traded life policy fund.
The fund, along with other life settlements products, closed to redemptions in 2011 when the FSA, then the regulator, warned the products were “toxic” and not suitable for unsophisticated investors.
Fellow sister title Investment Adviser has reported on plans by the funds manager, Managing Partners Limited, has now launched a separate fund, the Traded Life Policies fund (TLPF), into which current investors in TPF have the option to switch.
The investors have the option to invest in the equity of the new fund or invest in a bond secured against the assets in the fund.
