The Financial Conduct Authority (FCA) recently published a report setting out its findings from its thematic review of the fair treatment of long-standing customers in life insurance as announced in its Business Plan 2014/15.
The FCA’s thematic review assessed the treatment of closed-book customers against four high level customer outcomes:
• Does the firm’s strategy and governance framework result in the fair treatment of closed-book customers;
• Do the firm’s closed-book customers receive clear and timely communications about policy features at regular intervals and key points in the product lifecycle that enable them to make informed decisions;
• Does the firm give adequate consideration to, and take proper account of, fund performance and policy values in a way that ensures it treats its closed-book customers fairly and proportionately; and
• Are the firm’s closed-book customers able to move from products that are no longer meeting their needs in a fair and reasonable manner.
The review did not assess how individual policies were originally sold but focused on how customers are being treated now.
Tracey McDermott, acting Chief Executive of the FCA said: “Given the long-term nature of closed-book products, it is vital that customers are treated fairly and given the right information on an ongoing basis in order to help them make important financial decisions. We expect all firms with closed-book customers to take into account the findings we have published today and ensure they are treating their closed-book customers fairly. The practices at some firms appear to have been poor. We have particular concerns regarding how some firms communicated with their customers about exit and/or paid-up charges. We are now doing further work to understand the reasons for these practices, whether customers may have suffered detriment as a result and, if so, how widespread these issues are.”
The FCA’s findings
A total of eleven firms were included in the thematic review. The eleven firms varied in size, type and business model with the aim of capturing a representative picture of the sector as a whole. Included in the eleven firms were firms closed to new business, consolidators and firms that are still writing new business but also had closed-books within their business.
The FCA found a mixed picture with most of the eleven firms demonstrating good practice in one or more areas and poor practice in other areas.
One of the purposes of the FCA’s review was to gain an understanding of the levels of exit and paid-up charges being incurred by long-standing customers, and firms’ behaviour in applying those charges. We found that even where customers are aware of these charges, the impact these charges can have on the returns customers receive can be significant and they may present barriers to customers shopping around. FCA also assessed the communications firms provided to long-standing customers. As part of this assessment, the FCA sampled a number of documents sent to customers who had requested either to surrender or transfer their policies.
Six of the eleven firms who took part in the thematic review provided FCA with documents where exit or paid-up charges applied. In those six firms, the majority of policies reviewed did not include such charges. However, where charges were applied, our findings indicate that the six firms may have failed to inform customers of these charges at the time they were incurred (i.e. when the policy was exited or converted to paid-up or were charged on an ongoing basis for some paid-up policies). The FCA is concerned that as a result, some customers may potentially have been unaware that they would have to pay such a charge or that they have paid or are paying such a charge.
It is not possible at this stage to draw any final conclusions on the reasons for such practices; whether customers have suffered detriment as a result; or how widespread these practices were in these firms or in the wider market. These findings have driven the FCA’s decision to undertake further work in relation to this matter.
Improving future behaviour
In order to address the findings identified by the thematic review, the FCA is consulting on non-Handbook guidance which will provide firms with extra detail on the actions they should be taking in order to treat their closed-book customers fairly in the future.
In order to improve consumer outcomes going forward, the FCA will convene an industry-wide discussion with a view to industry reaching a voluntary solution to capping or removing exit and/or paid-up charges on investments of the type that were the subject of this thematic review. This work will be in addition to the new duty to make rules, proposed by HM Treasury and currently being considered by parliament, to cap exit charges on customers cashing in, and taking certain other action relating to, their pension savings from age 55 following on from the Government’s pension reforms.
Addressing past behaviour
The FCA will work with the eleven firms to address the specific findings identified through our ongoing supervisory work. However, due to the concerns identified above in respect of past conduct the FCA has concluded that further work is required to consider whether six of the eleven firms have failed to meet our standards and, if so, whether remedial and/or disciplinary action is necessary or appropriate in relation to these firms or others across the market.
The FCA has concluded that the best way to explore these issues further is for that work to be undertaken by our enforcement division using our investigation powers under FSMA. The FCA has commenced investigations into the behaviour of the six firms referred to above. The six firms are Abbey Life, Countrywide, Old Mutual, Police Mutual, Prudential and Scottish Widows[1].
These investigations have been commenced in order to enable the FCA to establish the reasons for the practices within firms; whether customers have suffered detriment as a result and how widespread any practices are within the six firms. No conclusion has been reached as to whether there have been any breaches of regulatory requirements. The commencement of investigations should therefore not be taken to indicate that they will necessarily result in disciplinary action against the firms involved nor does it indicate that a penalty will inevitably be imposed or that redress will be payable.
Depending on the outcome of this action the FCA may extend this work to a wider population of firms, including any of the firms in the thematic review and/or other firms in the life insurance sector.
For all six firms, we will investigate firms’ behaviour in respect of the disclosure to customers of exit and paid-up charges. The investigation will focus on disclosure of exit and paid-up charges after December 2008. This is because from 2004 to 2007 the Financial Services Authority published a number of communications on treating customers fairly (TCF) which made it clear that all firms were required to have regard to customers’ information needs through the life cycle of a product. Firms were required to implement changes to complete their TCF work no later than December 2008.
For two of the six firms (Abbey Life and Old Mutual), we will also investigate whether they contravened regulatory requirements across a number of other areas assessed in the thematic review. This investigation into wider contraventions of regulatory requirements will also focus on behaviour from December 2008.
As set out above no conclusion has been reached as to whether there have been any breaches of regulatory requirements. The FCA will not be commenting any further on this additional work until it is concluded.
