On December 11, the FCA published the results of a thematic review into annuities sales practices (TR14/20). The FCA found evidence that firms’ sales practices contributed to consumers not shopping around and switching when purchasing an annuity. The FCA found that sales practices may have led to consumers buying the wrong type of annuity and, in particular, not purchasing an enhanced annuity when they may have been eligible for one. As a result, some consumers may miss out on the opportunity of a higher income in retirement as a result of these sales failings. The FCA has also found examples of where the Association of British Insurers’ (ABI) Code of Conduct on Retirement Choices is not being applied.
The FCA is asking firms to do further work to determine if the findings of the thematic review are indicative of more widespread problems and consider if the issues raised in the review have led to poor consumer outcomes – in particular to discover whether customers with certain medical conditions or lifestyle factors have missed out on a higher retirement income. Importantly, the FCA states that it will not apply new standards retrospectively but will examine the period following the FSA’s thematic work undertaken in relation to Open Market Options in 2008.
As yet it is unclear whether any enforcement action will be taken as a result of poor conduct within individual firms. The FCA is now planning to work with firms in order to ensure that they improve annuities sales practices in accordance with the four FCA annuities consumer outcomes. The outcomes have been developed with regard to the risks to consumers in the market, FCA rules and principles in addition to the ABI Code of Conduct.
The four FCA annuities consumer outcomes are:
Outcome one: Consumers are actively encouraged (and not discouraged) to shop around, and can make informed decisions about how and when to buy annuities.
Outcome two: Consumers are provided with relevant and timely information about the potential benefits of any guaranteed annuity rate or risks of a market value reduction that exists in their existing pension contract.
Outcome three: Consumers are provided with appropriate and timely information about (a) the benefits of enhanced annuities and their potential eligibility; (b) an enhanced annuity being available on the open market (particularly, where their pension provider does not offer one); and (c) the potential for variation between different providers’ underwriting and its impact on the income offered.
Outcome four: Consumers are provided with appropriate information about the different annuity options available to them (joint v single, level v escalating, and various guaranteed periods) and the implications of selecting different annuity types.
The FCA will review the additional evidence gathered by firms and consider whether further action is needed.
For further information: TR14/20: Annuities sales practices
In addition to publishing the results of its thematic review, the FCA has also published the interim results of its retirement income market study. The FCA has found that competition is not working well in this market as consumers are missing opportunities to shop around and switch providers and are not therefore getting the best possible annuity.
The FCA is proposing five market remedies which seek to address the issues identified in the interim report. The objective of the remedies is to increase the usefulness of the information given to the customers not by providing yet more information, but providing better information that seeks to encourage shopping around and switching and tackling customer inertia.
The provisional remedies are as follows:
- Firms will be required to make it clear to customers how their quote compares relative to other providers operating on the open market.
- Firms and pension guidance providers must take into account framing effects (i.e. how information is set out) and other biases when designing customer decision making tools.
- The FCA will work with the Government to develop an alternative to the current ‘wake-up’ pack.
- In the long-term, pension ‘dashboards’ should be created which enable customers to view their individual entitlements including all of their defined contribution pension savings. Over time these dashboards could be developed to enable customers to view entitlement to defined benefit and state entitlement.
- Ongoing monitoring by the FCA.
Interested parties are asked to provide comments on the study by January 30, 2015.
For further information:
FCA publishes interim results of market study into retirement income (MS 14.3.2)