A much-trumpeted investigation into pensions announced by the Financial Conduct Authority (FCA) created a few problems of its own. The drama that resulted highlighted what a problematic area pensions can be.
It was a bold announcement. The type that was probably preceded by a few months of preliminary enquiries, a good few meetings of the FCA top brass and a little polishing from the press and PR office.
When the FCA announced it was to investigate millions of pension policies, it hoped to create a stir. And it certainly did….although not the sort that it wanted or expected.
The FCA appeared to be the knight in shining armour when it announced its review into what are called closed book policies. It expressed its concern that customers were trapped in poor investments by the use of high exit fees and voiced suspicions that insurers were using the large fees customers pay to subsidise other arms of their business.
The report, apparently leaked to the Daily Telegraph, prompted several insurers’ share price to plummet that day by up to 11.5% with an estimated £3 billion wiped off share values. One insurer who suffered as a result, Legal and General, called on the FCA to bring forward the publication of its plans “in view of the disorderly market.” That same afternoon, the FCA was forced to issue a clarification statement to explain the scope of its review. This was then followed four hours later by a further FCA statement in which it announced that it would carry out an investigation into its handling of the issue.
The FCA said: “The FCA board acknowledges the concerns of the market regarding today’s press coverage of the FCA’s proposed supervisory work on the fair treatment of long-standing customers in life insurance. The FCA put out a statement of clarification this afternoon.
“The board will conduct an investigation into the FCA’s handling of the issue involving an external law firm, and will share the outcome of this work in due course.”
It was reported that some insurers called for the head of FCA Chief Executive, Martin Wheatley. Chancellor George Osborne became involved when the Association of British Insurers (ABI) made its anger known to him. Treasury select committee chair Andrew Tyrie waded in, stating: “On the face of it, this is an extraordinary blunder. It is crucial we have a full and transparent explanation about how such an apparently serious mistake came to be made by our financial services watchdog - the body appointed by Parliament to enforce high standards of conduct.”
The FCA has now appointed a Clifford Chance solicitor to investigate and report back “as quickly as is reasonably possible’’ into how the announcement was leaked to such devastating effect. Finance and business watchers will find it ironic that the FCA, which is supposedly in existence to ensure sound financial conduct, is now shelling out a fortune on lawyers to investigate its own incompetence in what is supposed to be its field of expertise.
The FCA set alarm bells ringing in the pensions industry by saying it would begin an investigation into zombie funds this summer as part of a wider inquiry into allegations of longstanding customers being mistreated. Zombie funds, more formally known as closed funds, are with-profits life insurance funds that are closed to new business. It is expected that the main thrust of the inquiry will be millions of pension and investment policies sold in the 1980s and 1990s, in which savers are allegedly trapped by penalty charges of between 10 and 20% if they want to move their money. Many were sold by agents earning commission of between £1,500 and £2,000 a policy, with up to two years of contributions being taken out as charges, with further annual charges of up to 4%. Some in the industry believe this has led to people becoming trapped in funds with no annual bonuses that they cannot afford to leave.
The review is not looking at sales practices, so there will be no huge PPI-style payouts. According to the FCA, its inquiry will be a "supervisory piece of work". It will study a sample of some of the UK’s 30 million policies and consider whether customers are kept properly informed, receive appropriate levels of service and, arguably most importantly, are in the right fund for them.
Time, of course, will tell if this review makes any solid recommendations and, if it does, whether any action is taken to enforce them. Recent caps on the charges pension companies can impose combined with a decade-long series of regulatory changes have changed the landscape for such fund operators.
But will this review really produce results for the millions of people who bought personal pensions, endowments and life insurance policies totalling £150 billion in the 1980’s and 1990’s? It will not apply current standards retrospectively, meaning policy holders have little or no chance of reclaiming decades’ worth of fees. But if the review pinpoints identifiable practices or products where people have lost out firms could be forced to pay back customers who lost out.
It has to be remembered, however, that officials have been talking about putting the pensions right for roughly 30 years. Whether it be mis-selling, abuse of pension funds, greater accountability or simply poor products, the initiative never seems to have been there for a complete overhaul of this sector. We do not know what, if anything, this review will find that needs putting right. But the firms that are to come under scrutiny need to take a good look at themselves to see if they are functioning correctly.
At a time when the financial sector as a whole is under greater scrutiny because of misdemeanours that have been well publicised, any firm involved in pensions and investments has no excuse for not having thoroughly reviewed its own activities. The authorities have made it clear that self-reporting of any misconduct can help companies reach some sort of agreement with prosecutors, especially now that deferred prosecution agreements (DPA’s) are now part of the UK legal system. It may be that firms know they have done wrong but do not know how to proceed: who to approach, what to disclose, how to examine what has happened. They may not even know the extent of the problem. If any firms do find themselves in such problems they have to seek immediate and expert legal advice.
This review could prove to be a revolution in pensions or yet another false dawn. For customers feeling let down, ripped off or trapped in a product that was never fully explained to them they will be hoping that many wrongs can be put right. For the firms coming under the microscope they will be looking to be exonerated of any wrongdoing – a conclusion that any problems that do come to light were merely the inevitable drawbacks associated with the way this market functions.
It is an initiative that may take some time to reach any firm conclusions. The farcical fact that it has prompted the FCA to order a review into its own activities in announcing the initiative does not bode well. But with customers and companies both eager to see what transpires, we are set for a situation in which billions of pounds, the financial standing of millions of people and the prospects of hundreds of firms are all under review.
Watch this space.
