The city watchdog is planning an inquiry into 30 million policies sold by insurance companies from the seventies to the turn of the millennium, The Telegraph can disclose
Savers locked into rip-off pensions and investments could be given a free exit or moved to better deals, regulators will say next week
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The City watchdog is planning an inquiry into 30 million policies sold by insurance companies from the Seventies to the turn of the Millennium, The Telegraph can disclose.
The City watchdog is planning an inquiry into 30 million policies sold by insurance companies from the Seventies to the turn of the Millennium, The Telegraph can disclose.
The review, to begin this summer, will include pensions, endowments, investment bonds and life insurance sold by doorstep salesmen who were often spurred on by large commissions.
The Financial Conduct Authority is concerned that insurers are now “exploiting” loyal policyholders, who are “not given the same priority as new customers” and instead face high fees and substandard service.
The intervention marks a victory for The Telegraph’s long-running campaign for action over rip-off charges, particularly on pensions that severely reduce retirement funds over time.
The FCA will say that at the heart of the inquiry is an “unfairness” whereby some insurers use the returns from so-called “zombie” funds — which are shut to new customers and often neglected by existing clients — to pay bills from other parts of their businesses.
A large number of policies also include obstructive exit fees that can halve a policy’s value if a customer attempts to switch to a cheaper provider.
The watchdog will consider banning these “lock-in” fees if such a measure is deemed a practical way to overcome the poor treatment of policyholders.
Clive Adamson, the director of supervision at the FCA, told The Daily Telegraph: “We want to find out how closed-book products are being serviced by insurance companies, as we are concerned insurers are allocating an unfair amount of overheads to historic funds.
“As firms cut prices and create new products, there is a danger that customers with older contracts are forgotten. We want to ensure they get a fair deal. As part of the review we will collect information to establish whether we need to intervene on exit charges.”
Details of the inquiry will be included in the annual FCA business plan for the next financial year, which will be published on Monday. The watchdog said some policyholders may be funding plans that are “no longer suitable” for their needs. Insurers rarely performed suitability checks after policies were sold, Mr Adamson said.
It was wrong, he said, that some firms merely sent customers letters that were not “clear or engaging” and failed to spell out the extent of the charges.
Research published in The Daily Telegraph in September disclosed the array of costs associated with investments taken out in the Eighties and Nineties.
Some customers lost 5 per cent on each contribution to the fund, reducing every £1,000 saved to £950 immediately. One policy penalised customers who stopped saving by increasing management fees to 7.25pc a year, wiping £5,000 from a £10,000 pension over a decade.
A number of old plans levied additional administration fees of up to £65 a year, rising with inflation.
Having signed up at the prompting of a salesman, customers who later attempted to withdraw faced steep exit penalties, sometimes more than 50 per cent of the total pension pot.
Exit fees often last until the customer reaches the policy’s retirement age, which is typically 60 for women and 65 for men.
The FCA will conduct a broad review of investment products sold before the year 2000.
Many customers are still contributing to the old plans. Around £18 billion of premiums flows every year into older endowments, pensions, life insurance and with-profit funds, the regulator will say.
It fears this money is no longer managed carefully by insurance companies, who exploit customers’ “lack of engagement”.
In particular, many are paying into so-called whole-of-life insurance, which pays a lump sum to a spouse on the policyholder’s death.
Many elderly customers have been told to fund drastic increases in monthly premiums, or suffer cuts to the proposed payout. The FCA will investigate whether these customers are being treated fairly.
Banning exit fees on old pension policies would be one the strongest actions the FCA could take, Mr Adamson said. Alternatives include asking firms to move customers to a better product, providing clearer information, investing more in the management of old funds, offering a greater variety of investment options within the policy or cutting fees.
The FCA estimates that the policies under review are worth £150 billion. Many companies that issued the products have since been subsumed into rival organisations through takeovers.
Mr Adamson said: “Consolidation and outsourcing within the insurance industry means that policies taken out 10, 15 or 20 years ago are unlikely to be managed by the same brand, and by people in the same building as they were at their outset.
“We want to make sure that customers who have been 'sold on’ are treated fairly. Some terms and conditions that were common 20 years ago are not what we would want to see now.”
The review will exclude workplace pension plans offered by employers.
The Association of British Insurers (ABI) said many products that now seem expensive were “the best available at the time”. Hugh Savill, the director of regulation at the ABI, said: “Companies take their Treating Customers Fairly obligations very seriously.
Company Boards will regularly review all aspects of product design, customer servicing and product performance. This is as relevant to older product lines as it is to new ones.
“We will of course work closely with the FCA as they undertake this review.”
By Dan Hyde 27 Mar 2014
The Financial Conduct Authority is concerned that insurers are now “exploiting” loyal policyholders, who are “not given the same priority as new customers” and instead face high fees and substandard service.
The intervention marks a victory for The Telegraph’s long-running campaign for action over rip-off charges, particularly on pensions that severely reduce retirement funds over time.
The FCA will say that at the heart of the inquiry is an “unfairness” whereby some insurers use the returns from so-called “zombie” funds — which are shut to new customers and often neglected by existing clients — to pay bills from other parts of their businesses.
A large number of policies also include obstructive exit fees that can halve a policy’s value if a customer attempts to switch to a cheaper provider.
The watchdog will consider banning these “lock-in” fees if such a measure is deemed a practical way to overcome the poor treatment of policyholders.
Clive Adamson, the director of supervision at the FCA, told The Daily Telegraph: “We want to find out how closed-book products are being serviced by insurance companies, as we are concerned insurers are allocating an unfair amount of overheads to historic funds.
“As firms cut prices and create new products, there is a danger that customers with older contracts are forgotten. We want to ensure they get a fair deal. As part of the review we will collect information to establish whether we need to intervene on exit charges.”
Details of the inquiry will be included in the annual FCA business plan for the next financial year, which will be published on Monday. The watchdog said some policyholders may be funding plans that are “no longer suitable” for their needs. Insurers rarely performed suitability checks after policies were sold, Mr Adamson said.
It was wrong, he said, that some firms merely sent customers letters that were not “clear or engaging” and failed to spell out the extent of the charges.
Research published in The Daily Telegraph in September disclosed the array of costs associated with investments taken out in the Eighties and Nineties.
Some customers lost 5 per cent on each contribution to the fund, reducing every £1,000 saved to £950 immediately. One policy penalised customers who stopped saving by increasing management fees to 7.25pc a year, wiping £5,000 from a £10,000 pension over a decade.
A number of old plans levied additional administration fees of up to £65 a year, rising with inflation.
Having signed up at the prompting of a salesman, customers who later attempted to withdraw faced steep exit penalties, sometimes more than 50 per cent of the total pension pot.
Exit fees often last until the customer reaches the policy’s retirement age, which is typically 60 for women and 65 for men.
The FCA will conduct a broad review of investment products sold before the year 2000.
Many customers are still contributing to the old plans. Around £18 billion of premiums flows every year into older endowments, pensions, life insurance and with-profit funds, the regulator will say.
It fears this money is no longer managed carefully by insurance companies, who exploit customers’ “lack of engagement”.
In particular, many are paying into so-called whole-of-life insurance, which pays a lump sum to a spouse on the policyholder’s death.
Many elderly customers have been told to fund drastic increases in monthly premiums, or suffer cuts to the proposed payout. The FCA will investigate whether these customers are being treated fairly.
Banning exit fees on old pension policies would be one the strongest actions the FCA could take, Mr Adamson said. Alternatives include asking firms to move customers to a better product, providing clearer information, investing more in the management of old funds, offering a greater variety of investment options within the policy or cutting fees.
The FCA estimates that the policies under review are worth £150 billion. Many companies that issued the products have since been subsumed into rival organisations through takeovers.
Mr Adamson said: “Consolidation and outsourcing within the insurance industry means that policies taken out 10, 15 or 20 years ago are unlikely to be managed by the same brand, and by people in the same building as they were at their outset.
“We want to make sure that customers who have been 'sold on’ are treated fairly. Some terms and conditions that were common 20 years ago are not what we would want to see now.”
The review will exclude workplace pension plans offered by employers.
The Association of British Insurers (ABI) said many products that now seem expensive were “the best available at the time”. Hugh Savill, the director of regulation at the ABI, said: “Companies take their Treating Customers Fairly obligations very seriously.
Company Boards will regularly review all aspects of product design, customer servicing and product performance. This is as relevant to older product lines as it is to new ones.
“We will of course work closely with the FCA as they undertake this review.”
By Dan Hyde 27 Mar 2014
