Thematic Report: Annuities. An analysis of the key findings from the FCA s thematic review into the annuities market and guidance for providers.

Transcription

1 Thematic Report: Annuities An analysis of the key findings from the FCA s thematic review into the annuities market and guidance for providers. March 2014

2 Introduction The long awaited findings from the Financial Conduct Authority s (FCA) thematic review into the annuities market was published on 14th February. The report, the culmination of a year s work by the FCA, paints a damning picture of the industry, highlighting that the majority of consumers could have obtained a better rate on the open market than the annuity supplied direct from their pensions provider (or third party). Disappointingly the review has yielded little in the way of actual guidance from the FCA, instead providing an overview of their findings along with the announcement of a further market study. The FCA have recently advised that they will publish interim findings in 6 months, with the review finishing in about a year. The findings certainly provide food for thought and the issues highlighted underline the FCA s concerns around conduct risk and provide good examples of key drivers. This white paper contains an overview of the findings along with analysis and guidance from TCC regulatory experts. This review provides an excellent opportunity to self-appraise your practices in relation to annuity sales in consideration of conduct risk. Background Annuities have been on the FCA s radar for some time and have provoked increased interest from industry groups, the government and media. The FCA conducted this study to find out whether consumers are getting a fair deal when purchasing an annuity and to examine concerns that consumers are not making best use of the open market option (OMO). Part of their research examined the effects of consumer behaviour on purchasing and considered drivers of provider actions (such as profit from annuities). The pensions and annuities market is evolving with an estimated 11 million extra people expected to be enrolled into a pension scheme through auto-enrolment. This review, although lengthy, demonstrates the FCA s pre-emptive approach in action, with the aim of ensuring that the retirement market can meet the changing needs and demands of consumers. Additional research/work In addition to the FCA s research, the annuity market is also under scrutiny from a number of industry initiatives. As yet it is too early to assess the impact that the below initiatives have had on the market, although it is currently thought that the ABI s code has had limited effect March 2013 November 2013 December 2013 Rules created requiring insurers to inform consumers of the OMO - Financial Services Authority (FSA) Share this Code of Conduct on Retirement Choices introduced by Association of British Insurers (ABI) addressing low take-up rate of the OMO and providing consumers with access to materials and information The Pensions Regulator (TPR) publishes guidance for trustees of pension schemes on the retirement process Financial Services Consumer Panel publishes a report on consumers experience of purchasing an annuity Thematic Report: Annuities 2

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4 Findings A better rate on the open market The review found that the majority of consumers (80%) that purchased an annuity from their existing pension provider could have got a better rate if they had shopped around. It is estimated that 150,000 consumers each year could be better off from shopping around. 79% of those purchasing a standard annuity could be better off by an average of 67 per annum by purchasing from the open market - the equivalent of 1429 extra in their pension pot, or a 6.7% increase. 91% of those purchasing an enhanced annuity could be better off by an average of 135 per annum by purchasing on the open market the equivalent of 2428 extra in their pension pot, or an 8.3% increase. These percentages are worrying, illustrating the considerable consumer detriment and potentially the number of consumers that may need to be remediated. Lack of consumer engagement Consumer awareness of the OMO is high, with 90% of customers conscious that they can purchase an annuity from the open market. This can be attributed to the changes in disclosure regulations providing consumers with more information about their options. However this increase is not mirrored in switching rates where it is reported that only two thirds of annuities customers actually shop around. There is a lack of engagement in pensions and annuities products in general and there is concern that auto-enrolment, with its lack of decision-making, will compound this issue in the future. Lack of engagement can be partly attributed to the complexity of the decision making consumers are expected to make at retirement along with little financial capability or knowledge. Retirement products often require consumers to make choices regarding events that may happen in the future, governing which type of annuity they should purchase and when they should Share this purchase it. These can be complex decisions which have the potential for considerable detriment for the rest of their lives, should the consumer make an unsuitable choice at the time of selecting an annuity. This fear of getting it wrong, coupled with customers propensity to take the most straightforward option (inertia) could be an explanation for the gap between awareness and engagement. Conduct risk drivers There is a clear link between the findings from this thematic review and some of the root causes of poor consumer outcomes: conduct risk drivers. Inherent factors These are a combination of factors (both from the supplier and consumer) that interact to produce poor choices and therefore poor outcomes for consumers. Information asymmetries - the quality and type of information sent to those considering their retirement options can vary considerably, although this is improving through the ABI initiative for example, that is focused on increasing awareness and disclosure. Biases and heuristics - many consumers will choose to stay with their existing provider through inertia or trust and confidence in a firm they already know. Inadequate financial capability - this is clearly a barrier to shopping around in this market, where there is low engagement and understanding of retirement financial options and the advantages of shopping around. Key questions to consider: How do you ensure that you are fully engaged with your customers? Does your literature help the customer make an informed, unbiased decision? Does your information and literature make the complex decision of choosing a retirement option clearer for the customer? Thematic Report: Annuities 4

5 Structures and behaviours These are the processes and structures that have become embedded into firms, enabling them to profit from consumer behaviours. Conflicts of interest - when considering the rates offered to customers thought should be given to the fairness of the distribution of profit to the company and value for money to customers. Rates should also be consistent across client segments and not produce imbalances in incentives to any servicing agents. These points are particularly relevant because market forces would normally push consumers to switch to providers with better rates, however this paper suggests that this is not the case, reducing the incentive for rates to be improved. Culture and incentives - whether firms sales practices result in poor outcomes for consumers is still under review, however the retention rate is high and the reasons for this will be of particular concern to the regulator. Ineffective competition - again, as noted previously, where there is a barrier to switching, whether this be market or consumer related, this has an adverse affect on competition and reduces more favourable rates being provided. The regulator s new competition mandate means that they are likely to intervene in this area. Key questions to consider: Do you have a sales and retention strategy and is this aligned to your business plan and TCF? How are your sales and retention strategies targeted and how are staff rewarded? TCC can help you consider these questions through a review of your business practices in relation to the FCA s Firm Systematic Framework (FSF). See the end of this document for further information. Lack of access The review found there is a lack of access to enhanced annuities, for those who could qualify for one, from their current provider. Of annuities sold, 5% were enhanced annuities sold through existing providers, compared to 50% sold on the open market. Less than half of providers offer an enhanced annuity option to their existing pension customers meaning that some customers who are eligible for an enhanced annuity are not given the option to purchase one unless they do so via the OMO. In addition, consumers with a pension fund of less than 5,000 were provided with little choice on the open market and rates were often lower than for those with larger pension funds, illustrating a comparatively less accessible market. Inconsistent accessibility to financial products is not representative of treating customers fairly, as one party is always put at a disadvantage. In this case it would appear that accessibility is restricted in the areas of the market where less profit is generated for the provider, resulting in detriment to the customers who can least afford it. Poor sales tactics? Expected profitability of existing customers is higher than those from the open market, creating an incentive for customer retention. This could result in sales and retention strategies that are not conducive to good consumer outcomes and will form part of the regulator s market study. Does your strategy increase the risk of mis-selling to customers? Thematic Report: Annuities 5

6 FCA s next steps Unfortunately this review has not provided the FCA with enough information or evidence from which to enhance their regulations or provide guidance for firms to change the way in which they conduct annuity sales. Instead, they have announced that further work is required to identify the root causes of the issues mentioned in their findings, specifically focusing on competition. This will span the whole retirement income market, including income drawdown. Of potential high impact to firms is the regulator s statement that the market study will include a supervisory element looking at pension providers sales of annuities to their existing customers. Firms should expect that the discovery of any poor sales practices will amount to an extensive review of past business and an overhaul of sales practices, along with enforcement action and fines. The question over the suitability of annuity sales is high profile and has the attention of the government, media and many consumers. Therefore any bad practice or poor consumer outcomes uncovered are likely to be highly publicised. Guidance for providers It is apparent from this paper that the FCA has identified widespread detriment to consumers from not shopping around. What is not clear is the extent to which this is attributable or exacerbated by annuities providers and what the eventual remediation bill will be for the industry. Sales Practices Firms should be aware that the FCA will be conducting a review into their sales practices. Reflecting the regulator s pre-emptive approach, you should be proactively reviewing your business model and strategy, culture and sales practices to ensure that customers are always at the heart of what you do. Undoubtedly the level of oversight of your sales practices has been limited, after all you cannot check the suitability of every sale, however this could be masking a potentially extensive problem within your past business. Whether or not you think there are suitability issues within your back book you should consider reviewing a sample to assure yourself that there are no potential problems. Documentation You should also focus on looking at the documentation you send to clients as they reach retirement age. It can be difficult to get the right balance between providing too much information that clients are unlikely to read and insufficient information that doesn t make it clear what their options are. Getting this right can ensure that a greater proportion of the business you conduct is suitable in the eyes of the regulator. Similarly, you should look at how you market annuities to your existing pension clients. It is important that you are proffering unbiased options and informing the client of their right to shop around, particularly if they qualify for an enhanced annuity that you do not offer. Share this Thematic Report: Annuities 6

7 Treating Customers Fairly Clear and adequate documentation that informs clients of their right to choose an annuity from another provider is key to Treating Customers Fairly, especially Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint. If you are heavily marketing one option over another and you cannot demonstrate that in each case this was the most suitable option for the client, you are not ensuring good outcomes for your customers and consequently not adhering to TCF principles. In all communications to clients, firms should ensure that the information presented is fair, clear and not misleading, and ensures that the client has received all the relevant information they need to make an independent informed decision. There is no doubt that the fall out from the FCA s scrutiny of annuities has the potential to be sizeable. If you have started to evaluate the way in which you conduct business without being prompted, it is likely that you may be held in higher regard by the regulator. Added Value from TCC TCC can provide firms with four levels of assistance: Past Business Review - an efficient, cost effective review of your back books to identify unsuitable cases. Remediation, Redress and Calculations - our specialist redress team is experienced in managing the remediation of unsatisfactory cases, using sophisticated calculators to carry out both simple and complex calculations. FSF Audit & Assurance - a review of your business, mirroring the Firm Systematic Framework, including: business model and strategy; governance, risk & culture; product design; sales practices; and post-sales handling, providing recommendation for improvement and implementation where required. Documentation Review - TCC can conduct a review of your documentation and marketing strategy to provide assurance that you are acting in line with TCF principles. Click on the links for further information or call for an informal discussion of your requirements. Thematic Report: Annuities 7

8 Head Office The Consulting Consortium Ltd 23 Austin Frairs London EC2N 2QP Tel: +44 (0) Fax: +44 (0) UK Operations Centre The Consulting Consortium Ltd 1 Broadgate The Headrow Leeds West Yorkshire LS1 8EQ Tel: +44 (0) Fax: +44 (0) This document was produced by The Consulting Consortium Ltd 2014