By Adam Samuel
November 2016’s publication of
Consultation Paper (CP) 16/37 continues the now defunct Financial Services
Authority (FSA) and Financial Conduct Authority’s (FCA’s) long running worry
about customers not using the open market option when it can benefit them by
offering higher annuity rates generally or through impaired life annuities
which may be available to an individual customer from one provider but not
another. The Consultation Paper
looks at ways of prompting customers to look around by explaining that other
providers may offer a higher annuity amount.
February 2014’s Thematic Review (TR) 14/2 assessed that
80% of customers buying an annuity could do better on the open-market. The CP
does not deal with enhanced or impaired life products which form part of that
story. The regulator is doing a general test of wake-up packs which have to be
sent to customers well in advance of taking their benefits.
The regulator’s research showed that
a personalised communication showing the amount of annual income they could
gain from another provider produced a 40% shopping around rate, the highest
figure. It basically proposes to apply this to all pension annuity sales,
regardless of the type and source (personal, stakeholder or occupational) of
the funds concerned. Equally, anyone quoting an annuity to the customer, not
just the original pension provider has to follow this rules (or will have to if
they survive the consultation). The “pension annuity comparison information”
can be used instead of a key features illustration going forward.
The market-leading quote with which
the firm’s offering has to be compared has to be generated by looking across
the entire market using the same information that the provider has used to do
its own quotation. The Money Advice Service will supply the necessary facility
although firms can also use other software.
In the proposed presentation which
must appear on a single sheet of A4 if in paper form, the top box lists the
fund value to be used (net of any adviser charges commission, any adviser
charges or commission, annuity features requested such as whether the product
is single or joint life, in advance or in arrears, whether the income rate is
guaranteed and the period if any, whether annuity payments will grow with inflation
or something else, the next space shows the annual income offered by the
provider and then one finds “Based on your key information, there are quotes
available from other providers offering higher rates. If you select our product
you would be losing out on £ a year”. A bar chart has to appear with the firm’s
quotation on the left and has to start £20 below the income level being
offered. It must not include other material.
Where the provider’s offer is better
than the market figure, the quote must say: “Based on your key information, our
quote is the highest available to you”
Finally, the quote has to say:
“We are required by the Financial Conduct
Authority to inform you that you can shop around if you want to. If you want to
see what other options are available from other providers, please click here
and you will be taken to a secure comparison site. Other providers will not
know all necessary information about you or your circumstances. In order to
shop around, you will need to provide personal information, including that
relating to your health and lifestyle.”
Firms will have to provide
information on how to shop around, essentially the telephone number and web
address for the Money Advice Service.
The new rules will only apply to
guaranteed rather than indicative quotes. The idea is to prevent pension
providers from increasing their indicative rates and then dropping them when
asked to guarantee them. A guaranteed quote must be based on sufficient
material to enable the annuity to be successfully underwritten.
The rules will apply to all sales,
internal, open market and panels. The latter is needed because the panel may
not cover all annuities on the market.
Firms must warn customers who are
entitled to tax-free cash above 25% that they will lose this if they switch
provider. This should be presented prominently in both the pre-annuity purchase
disclosure and the wake-up material. Customers entitled to a guaranteed annuity
rate must be told the income available under that rate (typically offered by
the original pension provider) even if it is not already available and the date
Pension providers will have to use
the same underwriting information to produce their comparison as they have used
on their own quote. There is a real risk of customers being misled here if
different firms use enquiries of varying depth to underwrite.
Oral disclosure will have to include
the same information as written statements of guaranteed annuity quotations.
So, any statement must indicate the highest guaranteed quote available on the
open market “as an integral part of the conversation”. A sale can only go ahead
without disclosure in durable form if the client consents to this. Then, the
material must be supplied immediately afterwards.
Firms will presumably be able to
avoid disclosing the identity of their customers when producing quotes. They
may have to make reasonable efforts to obtain client consent where this is
The FCA plans to produce a Policy
Statement in the spring and bring the new rules into force on 1st September
When one sees the endless papers
coming out of the FCA about customers’ failure to use the open market option,
there is a temptation to require all customers either to access their own
quotations using the Money Advice option or seek independent financial advice.
In telling customers to shop around, pension providers are so obviously acting
against their own interests that regular breaches followed by more upholstering
of the rules is an inevitable outcome. The proposals here may improve matters
but they will not solve them until one prevents providers from giving such
obviously conflicted material.
Adam Samuel is a lawyer and compliance consultant and the author of the only
major book on financial services complaint handling. He combines diploma level
qualifications with the CII, a complete set of certificate level CII exams, the
CISI Diploma in Compliance with merit with his background as a barrister and
attorney. Formerly the second PIA Ombudsman and an IOB Ombudsman's Assistant,
Adam sits on the Ethics Committee of the Institute of Financial Planning and
sat for seven years on the Practice and Standards Committee of the Chartered
Institute of Arbitrators of which he was also the chairman of the Arbitration
Sub-Committee for four and a member for ten. Adam is a regular contributor to
Wolters Kluwer Financial Services’ Compliance Resource Network.