CP 16/37 – yet another effort by the U.K.'s FCA to persuade people to shop around for annuities | Wolters Kluwer Financial Services
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  • CP 16/37 – yet another effort by the U.K.'s FCA to persuade people to shop around for annuities

    By Adam Samuel

    Published January 05, 2017

    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 concerned.

    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 impossible.

    The FCA plans to produce a Policy Statement in the spring and bring the new rules into force on 1st September 2017. 

    Final thoughts

    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.

    About the author: 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.

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