FCA review on annuities confirms market failure
by Dr. Ros Altmann
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After a year-long inquiry, the FCA’s report on the annuities market confirms that customers are not being well-served by insurers. The Report is welcome but, rather than getting on with the urgent reforms required, the Regulator is just launching another review, leaving thousands of people at risk of poor value, unsuitable pensions for the rest of their lives.
More delays mean more consumer detriment as companies can continue to sell unsuitable annuities to customers who do not understand the complex issues and jargon of annuity purchase. Annuities are a unique financial product because once bought, you can usually never change them. Yet there are no proper safeguards to protect customers before they buy. Over 1000 people a week buy annuities, but the regulation of annuity sales seems to assume annuities are a ‘no-risk’ purchase that is suitable for all.
Insurers can sell standard annuities to someone who is seriously ill and do not even have to make the most basic suitability checks. Without such know-your-customer information, it is inevitable that many people will not receive good value for their pension savings and may be poorer for the rest of their lives.
Buying an annuity is not a ‘no-risk’ decision. There are different types of annuity, yet the FCA admits that most people are just offered a standard one – which will not be suitable for all. The standard annuity, bought by around 90% of people, has no inflation protection and no cover for a partner.
Yet the thrust of the Report’s findings suggests that if only people would shop around, the annuity market’s failings would be solved. This is simply not the case. Treating Customers Fairly is about far more than shopping around for a better rate. People need help to find what kind of product they should be ‘shopping around for’, otherwise they will just get a better rate for a product that is not suitable for them.
The FCA also found worrying failings in the way annuity broking websites treated their customers. Nevertheless, it is promoting these sites and believes they ‘allow people to buy an annuity direct, which can save money by foregoing professional financial advice’. This is not necessarily true. Buying from these sites often costs more than using an IFA.
The ideal scenario is for everyone to receive financial advice before they decide to buy an annuity. Obviously, for very small funds, this might not be realistic, however advice can offer the best customer protection. Unfortunately, the FCA has biased the annuity market against financial advice, because it forces IFAs to charge an upfront fee, but allows non-advised services to charge commissions which can be hidden until the last moment and higher than the cost of full advice.
There are some urgent reforms that would make a significant difference to customers buying an annuities, and these should not have to wait another year. For example ensure those selling annuities must make mandatory suitability checks (including asking about health issues, trivial commutation and whether to cover a partner)and provide risk warnings before customers lock into this irreversible purchase. Also reform the Conduct of Business rules which require pension providers to automatically offer an annuity to all customers, thereby forcing those who do need an income to find the best type of product themselves, either with advice or guidance. And finally, ban commission on the sale of annuities altogether and make sure all costs are disclosed up front, so there is no bias against independent advice which is best for customers.
These changes would be a major step forward for customers.
Dr. Ros Altmann