As two giant insurance companies are fined millions of pounds by regulators some finance experts are starting to speculate that the mis-selling of annuities could end up being an even bigger scandal than PPI.
Before pension freedoms were introduced in April 2015, buying an annuity with your pension pot was a way of guaranteeing a regular income for the rest of your life.
All of the big pension providers sold them and, unsurprisingly, they would try to persuade their clients to buy their new annuity from them.
But, as with any other financial product, the potential was there for mis-selling.
Standard Life and Prudential – two of the biggest names in the UK insurance market – have been hit with multi-billion pound fines after being found guilty of mis-selling annuities to their clients.
£30 million fine for Standard Life
In June Standard Life was hit with a £30 million fine by the Financial Conduct Authority (FCA) for the way in which it sold annuities to its customers over the phone.
The FCA ruled that it had ‘failed to put in place adequate controls to monitor the quality of the calls’ and encouraged staff to ‘place their own financial interests ahead of their customers’.
Striking similarity to PPI sales tactics
In a striking similarity to the way PPI was mis-sold, the regulator found that the firm was not acting in its customers’ interests when it offered front line sales staff ‘large financial incentives’ to make the sales.
The sales process also did not include information that if they have health or lifestyle factors which may shorten their life expectancy, they may be eligible for an enhanced annuity which paid a better return because of a shorter expected lifespan.
Instead, sales staff were going for the option of a standard annuity which was faster to sell and helped them to hit their incentivised sales targets.
£23.8 million fine for Prudential
In October the other insurance giant, Prudential, was hit with a £23.8 million fine for annuity mis-selling by the FCA and was forced to offer £110 million in compensation to more than 17,000 customers.
An investigation by the regulator found that the firm had a lack of controls in place over their annuity selling operation leading to a failure in sales staff advising clients they might get a better deal by shopping around instead of buying the Prudential product.
Call for sweeping review
Concerned that these two cases may just be the tip of the iceberg former pensions minister Baroness Ros Altman has called for ‘a sweeping review’ of UK annuity sales, saying: “I believe nearly all annuity providers have failed to treat customers fairly.
“They were never obliged to ask anything about a customer’s health or marital status. As a result, the customer was invariably at a serious disadvantage when making an irreversible purchase. An industry-wide review of past annuity sales? Yes, definitely.”
What could be done now?
Perhaps we should be supporting The Mail on Sunday’s campaign for an extension to the FCA investigation.
The newspaper, which had a large part to play in the exposure of the PPI scandal, says “We believe that:
- Every insurer should be required by the regulator to review ALL past annuity sales to check customers ended up with the most appropriate plan.
- Such a review should not only embrace those customers who were shunted into an inferior annuity because their ongoing health conditions were ignored by the provider. Or those who were not told about their right to shop around for a better annuity.
- It should also extend to those who ended up with annuities that offered no financial protection to loved ones – by failing to include a reduced spouse’s benefit. The exclusion of such a key annuity element exposes widows or widowers to a sharp drop in their household income.
- Where evidence of mis-selling is found, consumers should be offered immediate compensation (with interest) and be put in a position where future annuity payments reflect the rate they should have got if they had been given the best deal available at the time they annuitised.
- The review should embrace ALL insurers that sold annuities to their customers – and it should be conducted independently or under strict supervision. Where insurers have been taken over by rivals, it should be the new owner that is responsible for paying any compensation.
- Finally, the Government should resurrect a plan to allow people with annuities to cash them in. Such a scheme was promised under the 2015 pension freedom rules, but was then quietly abandoned amid claims it was unworkable.