FCA urged to require businesses that facilitate non-advised sales of annuities to facilitate advised sales too

In a new report (5-page / 57KB PDF) following a year-long study into the annuities market, the Financial Services Consumer Panel (FSCP) called on the FCA to "embody in regulatory rules and required standards the equivalent of a code of conduct for the non-advice market" relating to annuities. The code should require firms to have the "facility to offer full (fee-based, regulated) as well as non-advice (commission based)" services, it said.

An annuity is a policy from an insurance company that converts a pension fund, or part of a pension fund, into a regular pension income.

The FSCP said that it had identified problems with the market for annuities following on from the Retail Distribution Review (RDR). It said many businesses had stopped selling annuities on an advised basis due to the higher profit margins they could generate by selling them without offering advice. It said businesses could earn up to 6% in commission by facilitating the sale of annuities without advising consumers on those sales.

However, the FSCP raised concern about the quality of information some businesses were offering consumers on their websites. It said consumers with small pension pots may not be given the opportunity to receive advice on their pension investment decisions and may not be being told about the nature of the charges applied to annuity products they purchase or about other restrictions to their rights that apply when making investment decisions without the aid of advice.

"There is a danger that this shift in distribution channels will undermine the intentions of the RDR, leaving most customers with no choice but to use commission-based, non-advice services," the FSCP said. "Advisers’ preference for non-advice is due in part to the need to deliver efficient services for smaller pots. However, it is also due to advisers’ preference for commission (still permitted for non-advice services under the RDR but banned for advised sales) and, more importantly, for the lighter regulatory regime, under which advisers do not take responsibility for the suitability of sales."

"Non-advised services range in quality, but many appear to use limited panels of providers and to operate 'shallow' (superficial) underwriting processes for enhanced terms. Few disclose such practices clearly and explain the implications," it said.

As a result the FSCP called on the FCA to require businesses selling annuities to facilitate their sale on both an advised and non-advised basis. It said those businesses should be required to clearly offer the choice of advised or non-advised services on the homepage of their websites.

The businesses should be barred from describing products as being available for 'free' and should have to explain "the difference between a fee-based service, where commission is rebated to the fund, and a commission-based service, where commission is deducted from the fund and is accommodated in the rate".

In addition, the FCA should require those businesses to set out clear comparisons between fees and commissions relative to the size of individuals' pension pots and also explain to consumers that they would not have the option of raising a complaint about the sale of a product where they have made an investment decision without receiving advice first.

"By taking responsibility for the purchase, annuitants forfeit the right to a number of valuable consumer protection services, such as recourse to the Financial Ombudsman Service (FOS)," it said.

Financial services law expert Tobin Ashby of Pinsent Masons, the law firm behind Out-Law.com, said: "The FSCP has not held back on its view of the annuities market and early reports suggest that the FCA will be taking note. The annuities market does have specific sensitivities because of the one-off nature of the purchasing decision. This is a decision that potentially has far-reaching effects for a customer who has spent an entire career building up their pension savings."

"In the context of the FCA’s wider review of execution-only business though, whichever recommendations are taken into account for annuities, it would be inappropriate - and possibly very damaging - simply to apply them to all execution-only business," he said.

Among other recommendations made, the FSCP called on the Government to change UK tax rules to allow people to draw out a pension worth more than £18,000 in a single lump sum where the money is contained in several small pension pots. At the moment £18,000 is the maximum amount an individual can take out as a lump sum from a registered pension scheme without the activity being subject to tax, however individuals can only do this once in their lifetime.

Pensions law expert Simon Tyler of Pinsent Masons said: "Converting pension savings into retirement income is no easy task. Individuals need to be aware of what different sorts of annuity are available, of drawdown as an alternative to a pension and what the best rates are available to them. The solution for each individual will depend on personal circumstances, including that individual’s own specific state of health.  More can be done to assist individuals through this difficult process. The question is exactly what should be done, by whom, and at what cost."

"Simplifying the process can reduce cost, but the best solution may be lost by the simplification. Regulatory intervention needs to be thought through carefully. It must be properly targeted, and it must lead to better outcomes. Heavy-handed regulation could lead to increased costs that get passed onto individuals without actually raising pension incomes for individuals. The FSCP’s paper is a welcome trigger for more debate," he added.