Pensions  

Time to bring an end to mis-selling

Following initial findings in February 2014 that annuity customers were being poorly served by providers, the FCA’s latest long-awaited Thematic Review report clearly outlines evidence of ongoing mis-selling.

Disappointingly, the report is not proposing positive and immediate action to protect customers and stop this happening any more. It found that 60 per cent of annuity customers are just buying the annuity offered by their existing pension company even though 80 per cent of them could get a better rate by switching to another provider. It also uncovered inappropriate sales practices but no changes are being introduced yet.

For example, not all companies were clearly explaining the advantages of the open market option either in written materials or over the phone, despite this being required. In some cases, call centres were being incentivised to sell internal annuities with staff earnings linked to the number of annuity customers who did not move away. This is clearly against customer interest.

The report reveals similar failings to those uncovered six years ago – that customers in the worst health were most at risk of losing out from poor annuity sales practices. In 2008 the then FSA found pension firms were not telling people they could achieve much higher income from an impaired-life or enhanced-rate annuity by shopping around if they had health problems. Even though the FCA believes more than half of customers could qualify for health-related annuity rate enhancements, the rules regarding selling standard annuities are not being changed to protect the most vulnerable.

The FCA is merely asking them to look back at a sample of their sales since 2008 “to do further work to determine if the findings of this thematic review in relation to the sale of enhanced annuities are indicative of a more widespread problem”. This could lead to compensation if a proper assessment were made, which would be a good outcome for many. However, the regulator needs to stop future unsuitable sales immediately.

Given the falling numbers of people shopping around and the low proportion of enhanced annuity purchases, it is blindingly obvious that there is a widespread problem. Financial advisers report that around 60 per cent of their customers generally qualify for health or lifestyle-enhanced rates.

This shows the advantage of taking financial advice before annuitising, yet the FCA has not highlighted this. Indeed, it has found significant failings in the non-advised annuity sales process, yet still does not extol the virtues and value of using an adviser.

Shockingly, the FCA report also fails to take into account the commission customers pay to purchase annuities, whether in-house or non-advised. This can often cost them more than using an adviser who charges a time-based or flat fee. If the full costs of purchase are not disclosed to customers, how can they properly assess the value of independent financial advice to ensure they buy the right product and get best rates?

The regulator should require companies to declare up-front how much the customer will pay in pounds and pence to purchase an annuity, so customers realise the purchase is not ‘free’, and so may be more likely to take expert financial advice.