FCA forces providers to overhaul annuity practices

FCA forces providers to overhaul annuity practices

The Financial Conduct Authority is pressing ahead with rules which will force pension providers to direct consumers to an annuity comparison tool.

The regulator has this morning (26 May) published a policy statement on information prompts in the annuity market.

As part of the changes all providers will have to include information prompts which direct consumers to the Money Advice Services’ annuity comparison tool to increase shopping around.

These prompts should also include the amount used to purchase the proposed annuity, whether the annuity is single or joint life, whether the payment is in advance or in arrears of the start date and whether the income will increase in line with inflation.

It should also include whether the income paid by the annuity is guaranteed for any period along with the provider’s own quote.

Following a consultation the FCA has also decided to require the inclusion of a “clear and prominent” warning about enhanced annuities.

This is aimed at solving the problem of consumers buying standard annuities from their incumbent provider when they would have got a higher income buying an enhanced one on the open market.

The FCA said: “We accept that some consumers receiving the information prompt – which will usually compare eligibility for standard annuities – might be eligible to purchase an enhanced annuity.

“We agree, therefore, that the information prompt should inform consumers that they may be eligible to purchase an enhanced annuity.”

The new rules on enhanced annuities address a long-standing problem which the FCA has uncovered in the non-advised sale of annuities.

A thematic review of non-advised annuity sales between May 2008 and April 2015 found that where firms did not sell enhanced annuities, they did not always inform customers of this or even mention these products even if the customer was eligible for one.

The FCA considered whether it should mandate that consumers with a pension worth more than £30,000 should take advice before buying an annuity, but ruled this out because of the “associated costs”.

But the regulator added that consumers should be given the prompt to shop around regardless of whether they had a financial adviser.

It said: “Where a consumer uses an intermediary firm that sources annuities from the whole market, including a broker or independent financial adviser, the consumer is likely to be quoted the best rate available on the market.

“However, where the intermediary firm does not have access to every rate available, it is possible that the quote presented by the intermediary firm does not produce the best annual income available to the consumer.

“In that situation, the consumer would benefit from being made aware of this so they can shop around more widely if they choose to do so.”

The FCA considered whether to direct consumers to a number of different annuity comparator tools but ultimately decided to only include that Mas tool because its research demonstrated that providing too much information could reduce its effect.