The Financial Conduct Authority (FCA) is being urged to launch an immediate review of the fast-growing direct sale annuity market amid concerns consumers may be unaware of the costs involved or their statutory rights.
The influential Financial Services Consumer Panel made the call as a flurry of “execution-only” online services has launched in recent months to take advantage of the growing appetite for do it yourself investing.
Execution-only services offer a new option for those approaching retirement being encouraged more than ever to shop around for their pension income, and not settle for the annuity rate offered by their savings provider.
But the panel, appointed by the FCA to advise on policy, is concerned that “non-advice” sites, which charge commission and not upfront fees, are not required to be sufficiently transparent about their operations.
“By ‘non-advice’ I mean the annuity websites that offer a great deal of information for ‘free’ and help guide customers to the right decision, but nevertheless, under the regulation, are execution-only,” said Debbie Harrison, who is a panel member and also senior visiting fellow of the Pensions Institute at Cass Business School.
“This means that they are commission-based. People want to go DIY to save money, but in some cases commission can be 3 per cent or higher, so they may pay more than had they got advice. And they won’t find out about this commission which comes off their pension fund, until they are well into the online sales process,” she told the Financial Times.
Harrison said there are some good execution-only websites, but others appear to have “poor or even deliberately misleading messaging” and do not explain the implications of this type of advice in relation to the cost, payment form, and regulatory protections.
“Some of these sites look like advice, and take you through a process which feels like advice,” she said.
“The panel would like to see greater clarity in the regulation of such sites. They should be required to prominently display on the homepage that this is an execution-only service. They should explain this means commission is paid, which in some cases, might be as much as paying for full advice. The lack of recourse to the Ombudsman should also be explained.”
The FCA has committed to considering the potential risk to consumers from non-advised sales of all products, which have proliferated since advisers were banned from taking commission on new business from product providers. They now charge upfront fees instead.
“Annuities are not like car or home insurance,” Harrison said. “They are complex, one-off purchases which are irreversible. This market should be reviewed as a priority.”
Ros Altmann, an independent pensions and economics policy expert, also believes the regulator needs to act. “It is absolutely essential that the FCA looks properly at what is happening in the annuity sales process,” says Altmann. “At the moment, there is no proper protection for customers and the likelihood of mis-buying and probably mis-selling too, is high. The regulator knows most people don’t understand annuities.”
The panel’s comments come as the country’s biggest retailer, Tesco, prepares to launch its own comparison service.
They also coincide with an FCA probe into the £12bn-a-year annuity market. This review is currently focused on finding out why only 50 per cent of people seeking an annuity last year shopped around, and how much income they lost by accepting the default rate offered by their insurer.
In an interview with the Financial Times, the FCA said that buying an annuity was a “a big decision, a once-in-a-lifetime decision for most people”, but resisted calls for an urgent review of non-advice websites.
“When we have the results of the first phase of our review of annuities, we will consider what further work, if any, we should undertake,” said Nick Poyntz-Wright, head of life insurance with the FCA.
Read Josephine Cumbo’s interview with Nick Poyntz-Wright at www.ft.com/wright-interview
However, he added: “We expect appropriate disclosures and safeguards to be put in place by those distributing on a non-advised basis. What we would insist on is that customers are getting clear information so they can see what the overall terms are and that they are pointed in the right direction.”
Hargreaves Lansdown, the country’s biggest broker, which recently launched an execution-only annuity service, said: “It is essential that investors get the best possible support when shopping around for a retirement income; this means choosing the right type of retirement income as well as getting the best possible rate. They also need to have a clear understanding of how much they are paying for a service and what they are getting in return.”
Payingtoomuch.com, another execution-only annuity website, said its charges were displayed as the regulator has intended.
The company said: “PTM always rebated part of the commission. In the end, however, the commission is less important than the final annuity payment, so for comparison customers should (and do) compare their annuity income to find their best option – not the option that pays the least commission, which would be an odd motivation.”