A scandal or a cock-up?
This is the question I ask myself when I hear about Prudential’s £23m fine for failures relating to non-advised annuities sales.
This follows Standard Life’s £30m fine in July 2019. As with most high profile public cases, there is a bit of both.
First, I declare an interest as I have formally and informally helped both companies in the past and I was marketing director of Prudential annuities for a short period in 2000.
However, this does not prevent me from being balanced and critical where necessary.
To understand how two big giants in the pension industry were brought to account over the selling of annuities it is necessary to understand the context at the time, so here is a brief history.
The first specialist annuity advisers arrived on the scene in the early 1990s.
The annuity market was revolutionised by two small companies in the late 1990s when The Pension Annuity Friendly Society and Stalwart started paying a higher income for those who smoked or had medical conditions that might reduce their life expectancy.
- Prudential got fined £23m for annuities mis-selling
- The landscape for non-advised changed following the RDR
- No-advice is not cheap
By the early 2000s there were a small number of specialist insurance companies offering enhanced annuities, joined by Just Retirement in 2004.
2008 is a key date, because by this time it was common knowledge that people could get a higher annuity if they smoked, were taking prescription medication or had a medical condition.
Before this date, it could be argued that the option of a higher annuity based on medical and lifestyle factors was not well publicised and it was difficult to access these rates, but after 2008 the enhanced option was well and truly in the public domain.
There was no excuse for insurance companies not informing their customers they could both shop around for the best annuities and get an enhanced annuity if they qualified on medical or lifestyle grounds.
So, what went wrong?
Reading the final notices from the Financial Conduct Authority to both companies, there were clearly poor communications, flaws in the process and even some sharp practices.
I do not see my job as bashing the insurance companies as the FCA has made its concerns and enforcement measures public.
But I can add to the debate by providing more background.
Most cases of financial mis-selling happen because the financial landscape makes it possible.
Think of the pension transfers mis-selling that occurred in the late 1980s and early 1990s.
This was caused by the lack of rules on pension transfers and few restrictions on the way advisers and pension salespeople operated.
It is no excuse for the recent annuity mis-selling, but the creation of a huge market in non-advised annuities sales in the early 2000s was the catalyst for this problem.