FCA annuity review stops short of retrospective regulation

While the majority of firms will have to provide more evidence in relation to the sale of enhanced annuities, new standards will not be applied retrospectively, the Financial Conduct Authority’s latest thematic review of the annuities market has concluded.

In recent weeks the industry had raised concerns over the possibility of retrospective regulation for the many thousands of customers that had been mis-sold normal annuities when they actually qualified for more generous enhanced deals due to poor health.

This followed an admission from Aviva that it had initiated a redress programme for around 250 customers who sold a conventional annuities 2013, following a telephone sales process which did not ask any health questions. The firm said it was making average back payments of £500 and uprating future income payments by around £120.

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The FCA’s long-awaited thematic review into annuities sales practice, published today (11 December) found that consumers are potentially buying the wrong type of annuity, in particular not purchasing an enhanced annuity when they may be eligible for one.

“Bearing in mind their individual circumstances, we are asking the majority of firms to do further work to determine if our findings in relation to enhanced annuities are indicative of a more widespread problem and/or have led to poor consumer outcomes,” read the report.

“We will not apply new standards retrospectively but will look at the period since the FSA’s previous thematic work on open market options in 2008.”

The FCA stated that some firms need to make significant improvements to their documentation, but the most troublesome area was in phone-based sales.

“We found evidence indicating that significant and wholesale improvements may be required to enhance firms’ conversations with their customers conducted by telephone,” the review read.

The majority of calls that the FCA listened to in relation to enhanced annuities did not encourage customers to shop around, with the regulator concluding that a likely driver of the poor disclosure on calls is the evidence of insufficient training and call scripts in this area.

Where the review has identified poor practice, the FCA will work with these firms to make improvements, including: updating the call handler training and scripts; improving customer literature and the clarity of messaging; and taking into account the new retirement options that will be available from next April.

The FCA’s review also specifically mentioned problems with restricted panel arrangements that let consumers compare the products and prices from a selection of providers.

It noted that market coverage of restricted panels varies from panel to panel, meaning choice may not be from the full open market.

“We found examples where the disclosure to customers was not sufficiently clear that the panel service gives the customer access to a restricted portion of the open market and that the customer may still receive a higher income in retirement from shopping around on the full open market outside of the panel arrangement,” it stated.

The review concluded that its particular concern was with the enhanced annuities market, where the FCA saw widespread evidence that it is not working well for consumers.