Posted: 3rd November 2016
On the 14th of October 2016, the FCA published the findings of its thematic review of non-advised annuity sales practices.
The review examined whether firms provide customers with sufficient information about enhanced annuities. It also sought to discern whether firms made their customers aware of enhanced annuities and their eligibility for them, and whether customers were encouraged to shop around in case they could get a higher income elsewhere.
The FCA reviewed the non-advised sales of annuities made by pension providers to their customers between May 2008 and April 2015. They looked at the level and standard of information provided in relation to enhanced annuities, sometimes referred to as ‘impaired life annuities’.
The review incorporated 1,200 non-advised sales across seven firms (between them, these firms account for approximately two thirds of the annuity market).
Megan Butler, Director of Supervision for Investments, Wholesale and Specialist at the FCA, said:
“Annuities play an important role in providing an income for retirement. It is important that consumers get the right information at the right time in order to make the right decision for their retirement.”
Key Points from TR 16 / 7
The FCA found no evidence of an industry-wide or systematic failure to provide customers with sufficient information about enhanced annuities. Many of the firms provided clear and comprehensive information to customers with written communication tending to meet regulatory standards.
However, the FCA did have concerns with a small number of firms when significant communications took place verbally (normally over the phone rather than face-to-face). This could have caused some customers to purchase a standard annuity when they may have been eligible for an enhanced annuity.
The failings caused sufficient concern at a small number of firms, and these firms are now being asked by the FCA to review all non-advised sales since July 2008. Where appropriate, firms should provide redress. These firms are also being investigated by FCA’s Enforcement Division to determine whether further action is necessary.
The findings highlighted a number of areas of concern the FCA found as part of its review:
- Call handlers were sometimes heavily reliant on call scripts, meaning they were unable to respond to customer needs or clarify areas of misunderstanding
- Customers were not aware they could obtain a higher income by shopping around, even when enhanced annuities were discussed
- Clear messages about enhanced annuities were undermined by subsequent comments, which included call handlers under playing the level increase which a consumer may have obtained by shopping around
- Firms not selling enhanced annuities did not always inform customers of this, or did not even mention enhanced annuities at all when speaking with customers
Megan Butler: “While we have found particular poor behaviour at a small number of firms, there is no evidence that firms have systematically failed to provide customers with the information required by our rules. Firms, particularly those outside our sample, should look at the report we have published today and consider whether they can make improvements.”
Regulatory next steps
In the immediate term, firms can expect no further regulatory updates on this topic. However, the FCA encourages all firms to consider how their communications and sales process may be strengthened to ensure consumers are getting all the information required at the time they require it.
In the interests of proportionality, the regulator will themselves focus their investigation on the top four firms by market share. This will be both a barometer for the current state of performance in the sector and give the regulator a view of the outcomes of the greatest number of customers.
They are confident that this approach, combined with the wide-ranging and detailed sampling completed already, will provide a comprehensive view of any risks that might exist with customers who have taken out annuities across the relevant period.
Considerations for firms
Firms across the sector will be impacted to different extents, and as a result there will be a variety of considerations and actions required by firms. Those looking to proactively gain assurance over legacy business should consider:
- Assessing a sample of their highest-risk cases and reflecting on outcomes within the sample (there is no prescribed responsibility for firms to do this by the FCA)
- Whether they have evidence to show their ongoing assessment of customer outcomes in this space
- Whether training and competency programmes for frontline staff are sufficient and whether this is backed up by a customer-centric ‘tone from the top’ and business culture
- Whether customer retention targets and sales incentives have any effect on customer outcomes
- Whether any potential issues in the back book need to be addressed, and whether the considerations around these customers should also lead firms to make changes to current products and processes
- How they ensure that the right information gets to customers at the right time, and that this is agnostic of product – this is vitally important in the context of freedom of choice
The FCA have recently made interventions in this area, so there is some impetus to consider the above actions and ensure your firm stays clear of regulatory censure while providing the right outcomes for customers across all possible retirement choices. Read the full thematic review.