Enhanced annuity non-advised sales – not as bad as first feared?

31 October 2016. Published by Rachael Healey, Partner

The FCA's thematic review into non-advised enhanced annuity sales found no evidence of an industry wide or systemic failure to provide customers with information about enhanced annuities or the open market option. There will not be a general industry wide remedial action.

Having identified potential concerns in December 2014, the FCA's thematic review looked at whether existing customers of pension providers were informed about the availability of and their potential eligibility for enhanced annuities and whether it was raised with customers that they could get a higher annuity rate from another provider. 

However, a small number of the 7 firms which formed part of the review have been invited to review all non-advised sales from July 2008 and where appropriate provide redress.  These firms are required to appoint skilled persons under the FCA’s s.166 powers.  Standard Life has announced that it is one of the firms that the FCA has invited to conduct a review.  The FCA has also announced that it will be sampling the largest providers of the remaining one third of the market as part of its on-going review.

The review considered more than 1,200 non-advised annuity sales at 7 firms for the period May 2008 to April 2015, taking account of approximately two thirds of the annuity market.

It identified two typical failures (1) a process failure and therefore breach of FCA Handbook rules (Type 1 Failure) and (2) where there was a breach of the rules, whether the breach is likely to have changed the customer’s behaviour in a way which may have caused the customer actual loss (Type 2 Failure).   Although the FCA’s review identified a “relatively high incidence” of Type 1 Failures, it also found that impacted customers typically still received sufficient information throughout the sale.  Accordingly, firms returned “relatively low” Type 2 fail rates – there was sufficient evidence to show that the process failure did not affect what type of annuity the customer bought.

There were, however, areas of concern highlighted by the FCA where there was a Type 2 Failure.  These included (1) call handlers being heavily reliant on call scripts such that they were unable to respond to clients’ needs or clarify misunderstandings, (2) customers were not always aware that they could achieve a better rate by shopping around and (3) firms that did not sell enhanced annuities did not always inform customers of this or did not on occasion mention enhanced annuities at all when speaking to customers.  One example highlighted in the paper is that firms did not explain that enhanced annuities were available where lifestyle factors (e.g. being overweight) may contribute to reduced life expectancy and often the focus was on serious medical conditions such as heart disease and cancer.  Another example cited circumstances where call handlers informed customers that they did not qualify for an enhanced annuity with a provider when an enhanced annuity may have been available with another provider.

The FCA invites all firms to consider the paper and where appropriate explore how their communications and sales processes could be strengthened and suggests that if customers feel that they have not received sufficient information they should contact their provider.  The FCA is also requiring firms that reported the highest rates of non-compliance to review all in-scope non-advised sales from July 2008 to the present time.

The FCA’s findings are likely to be broadly welcomed and particularly the fact that there is to be no industry wide redress scheme.  However, with some firms having to conduct a review of non-advised sales this does not imbue confidence in the pensions market in circumstances where we are seeing an increasing number of non-advised sales involving complicated products.  For example, over 50% of sales have been non-advised since the introduction of pension freedoms.  The non-advised market is something the FCA is looking at in further detail as part of its broader pension freedoms review and so the headlines for pensions are unlikely to be over just yet. 

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