AbrdnAug 14 2019

FCA’s approach to regulation

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
FCA’s approach to regulation

The Financial Conduct Authority’s decision to hand down a fine of £30,792,500 to Standard Life Assurance last month attracted headlines due to the size of the fine and the fact that it was levied against one of the most recognised names in the industry.

It also provides us with a clear picture of its preferred approach to regulation, containing several key elements that we can expect see in future rulings:

  • A thematic review that lays out the regulator’s desired consumer outcomes and the improvements required across the industry.
  • Follow-up investigations at company level looking at the practices being followed within this context.
  • A significant financial penalty for identified breaches, reduced by a reward for early co-operation.

Consumer outcomes

The thematic review of annuity sales practices was one of the first initiatives launched by the FCA in 2014, on the back of concerns that consumers were not shopping around to obtain the best available rates.

In its initial review it found that 60 per cent of consumers were not switching providers when they bought an annuity, despite the fact that around 80 per cent of these consumers could get a higher income on the open market.

For enhanced annuities the result was even worse, with an estimated 91 per cent likely to be able to find a higher income than the one offered by their existing provider.

The FCA’s follow-up work identified that providers were not doing enough to actively encourage customers to shop around, and while the majority of customers were informed about enhanced annuities, many were not told they could shop around for them.

Buying an annuity is a one-off decision and not looking for the best rate impacts on customers for the whole of their lives. In the case of those eligible for an enhanced annuity rate, the impact was estimated to be, on average, around £110 to £175 a year.

Performance against standards

SLA, which has since been sold to Phoenix Group, was judged to have breached two of the FCA’s principles of business in relation to non-advised annuity sales:

It failed to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems in respect of complex products for which the ordinary customer’s need for accurate information is high; and

It also failed to pay due regard to the interests of its customers and treat them fairly.

Within this there are some more explicit issues, which, with hindsight, are obvious sore points with the FCA:​​

  • Failure of SLA senior management to sufficiently monitor annuity sales calls that could have identified potential conflicts of interest between corporate objectives and the needs of the customer.
  • SLA employed sales incentives that rewarded staff for retaining annuity business even though it may not have been in their best interests.
  • SLA failed to help customers identify if they might be eligible for enhanced annuity rates that could have provided them with a higher income.

These failures are clearly linked. The sales incentives made it unattractive for staff to direct customers to any non-SLA options, including those that were clearly better for the client, and the lack of management control meant this conflict was not picked up or managed.

In an environment where we are all preparing for the introduction of the Senior Managers and Certification Regime, it is now clear that the regulator is looking not just at failures of process but also the management oversight that should have identified and addressed those failures.

According to the penalty notice, SLA’s monitoring and sampling of calls was inadequate, with under 6.3 per cent of its non-advised annuity sales being sampled in 2014, despite a significant increase in business levels.

Of these, 22 per cent were recorded as an overall fail, and 11 per cent as a failure under ‘treating customers fairly’. 

Sales incentives

Call handlers in both customer services and Standard Life Direct were offered financial incentives to sell SLA annuities through normal sales bonuses and annuity-specific sales initiatives.

Sales bonuses included the monthly production bonus and ‘Mad March’, which offered higher bonuses for business transacted at specific times of the year, which formed a very significant part of staff remuneration.

During 2008-14, the average monthly production bonus was estimated to provide 85 per cent of the basic salary of a call handler, with 58 per cent being specific to annuities.

Remarkably, concerns regarding these practices were raised with senior management in 2011 and 2012, demonstrating that they were aware of possible consumer detriment.

However, no significant changes were made. Rewarding sales performance is legitimate, however the FCA requires that steps must be taken to ensure that customers are protected from any unsuitable outcomes that might result from a conflict of interest between the needs of the customer and those of the business.

Enhanced annuities

The FCA has long considered enhanced annuities to be an area of concern within annuity sales, and as such it was always likely to be under strict scrutiny.

SLA did provide written information to customers about the availability of enhanced annuities, however, it was judged that high-level call guidance and training for call handlers was insufficient, resulting in a clear risk that customers would not be clearly informed of their potential eligibility or the advantages of an enhanced annuity.

Key points

 

  • SLA was fined £30m by the FCA last month
  • The FCA has taken several actions
  • Call handlers were offered financial incentives to sell SLA annuities

Unfortunately for SLA, the financial consequences of this particular failure does not stop with the current sanction and they are currently carrying out a voluntary review of around 81,000 past cases where the customer may have been eligible for an enhanced rate but did not buy one.

Where it is identified that the customer would have been better off with an alternative product, SLA is expected to pay redress that will put them in the position they would have been if had they bought the alternative product now and for the remainder of their life.

This process has already resulted in redress of approximately £25.3m to 15,302 customers, with the final bill estimated to be around £61.2m.

Had SLA not carried out the voluntary review, their fine would have been much higher. 

Learning points

Keep up-to-date with relevant thematic reviews – these provide information on the standards against which your business will be measured.

Be mindful of the recent emphasis on data gathering and make sure your management information is sufficient to evidence the effectiveness of your business and advice processes.

Always cooperate fully with any regulator requests – timely responses will be in your favour and could result in lower penalties.

Fiona Tait is technical director of Intelligent Pensions