Evidence of the Financial Conduct Authority (FCA)’s determination to improve customer outcomes in the pension sector came in late July 2019 when it imposed a £30,792,500 fine on a large insurance firm for failings related to the sales of annuities. The regulator took this enforcement action even though the disadvantaged customers did not actually receive advice from the insurer.
The central problem with the firm’s practices is one that has been seen regularly in financial services over the years, namely that firms have remuneration arrangements that could encourage them to act contrary to customers’ interests.
FCA rules on selling non-advised annuities require firms to explain to customers that they may get a better rate if they shop around on the open market for an annuity from another provider. However, the firm’s call handlers failed to provide some customers with appropriate information about enhanced annuities, including the option to shop around for a better deal. It was perhaps not surprising that some staff acted in this manner given that it was possible for them to more than double their basic salary by achieving high sales volumes.
The firm’s procedures compounded the problem as they gave call handlers significant discretion about how they communicated with customers. The criticisms of senior management at the insurer include:
• They did not put in place adequate systems and controls to mitigate the risks created by these unspecific procedures and the large bonuses staff could earn
• They failed to adequately monitor sales calls
• They did not take steps to collect management information that could have allowed them to identify the issues with the firm’s annuity sales
The FCA’s Final Notice explains the importance of giving full information about enhanced annuities, when it says:
“Where customers have a shortened life expectancy because of specified health or lifestyle conditions, such as a heart condition or smoking, they may be eligible for an enhanced annuity which would pay a higher income. This is on the basis that the annuity would likely be paid for a shorter period. Therefore, it is important that the firm obtains adequate information from the customer to determine whether they may be eligible for an enhanced annuity, and provides clear, fair and not misleading information about enhanced annuities.”
The FCA adds that:
• Annuities are a complex product where it is vitally important that accurate information is provided
• The choice of a particular annuity can affect customers for the rest of their lives
• Some of the customers purchasing annuities were potentially vulnerable – the FCA is now making frequent pronouncements on the need to protect vulnerable customers from harm
In addition to the fine, the insurer has been forced to pay significant compensation to the affected customers, and by May of this year £25.3 million had been paid to 15,302 customers. The review encompasses approximately 81,000 sales of non-advised annuities where customers may have been entitled to an enhanced annuity, and the final compensation bill is estimated to be as high as £61.2 million.
Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said:
“[name of firm]’s controls needed to place fairness to customers at their heart. Here, the financial incentives available to staff for selling non-advised annuities by telephone created conflicts which led to unfair outcomes for some customers. Firms must have controls in place to ensure they are prioritising fairness to customers.”
This case again highlights the need for all firms to think about whether their remuneration structures could lead to poor customer outcomes. The FCA requires firms to take action to mitigate any risks that may arise from their incentive schemes.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article