The Problem with non-advised annuities
A scandal or a cock up? This is the question I ask myself when I hear about Prudential’s £23 million fine for failures relating to non-advised annuities sales. This follows Standard Life’s £ 30 million fine in July 2019. As with most high profile public cases, there is a bit of both.
First, I declare an interest as I have formally and informally helped both companies in the past and I was marketing director of Prudential annuities for a short period in 2000. However, this does not prevent me from being balanced and critical where necessary.
To understand how two big giants in the pension industry were brought to account over the selling of annuities it is necessary to understand the context at the time, so here is a brief history.
The first specialist annuity advisers arrived on the scene in the early 1990s. The annuity market was revolutionised by two small companies in the late 1990’s when The Pension Annuity Friendly Society and Stalwart who started paying a higher income for those who smoked or had medical conditions which might reduce their life expectancy.
By the early 2000’s there were a small number of specialist insurance companies offering enhanced annuity and Just Retirement started offering enhanced annuities in in 2004.
2008 is a key date because by this time it was common knowledge that people could get a higher annuity if they smoked, were taking prescription medication or had a medical condition.
Before this date, it can be argued that the option to get a higher annuity based on medical and lifestyle factors was not well publicised and it was difficult to access these rates but after 2008 the enhanced option was well and truly in the public domain and there was no excuse for insurance companies not informing their customers they could both shop around for the best annuities and get an enhanced annuity if they qualified on medical or lifestyle grounds.
Reading the final notices from the FCA to both companies, there was clearly poor communications, flaws in the process and even some sharp practices. I don’t see my job as bashing the insurance companies as the FCA has made it concerns and enforcement measures public. But I can add to the debate my providing more background text.
Most cases of financial mis-selling happen because the financial landscape makes it possible. Think of the pension transfer mis-selling which occurred in the late 1980s and early 1990s. This was caused by lack rules on pension transfers and few restrictions on the way advisers and pension salespeople operated.
It is no excuse for the recent annuity mis-selling but the creation of a huge market in non-advised annuities sales in the early 2000s was the catalyst for this problem.
Unintended consequences of RDR
One of the unintended consequences of RDR was the rise in non-advised annuity propositions. Although the new RDR rules came into force on 31 December 2012, many companies started setting up non-advised services well in advance.
RDR gave an unfair advantage to non-advisers brokers over regulated advisers in two ways: First of all commission was retained for non-advised sales and secondly, annuity salespeople didn’t need any qualifications. This created an unfair situation where advisers were faced with much higher regulatory fee and obligations and quite rightly where required to be completely transparent with fees.
I should point out that there were important differences between the non-advised annuity services offered by insurance companies offering and annuity brokers. Brokers were whole of market and specialised in enhanced annuity whereas insurance companies were offering their own annuities with perhaps a link to single company for enhanced annuities.
However, both models capitalised on the public’s perception that the most important part of arranging an annuity was to get the highest income and little else mattered. Also, many people think they can make complex decisions themselves by simply shopping around for the best annuity rate. This message is reinforced by marketing that suggest they can get up to 40% more by shopping for an enhanced annuity.
One of the unintended, but predictable consequences of RDR was the creation of the so-called advice gap where a significant number of people were given the impression that financial advice was outside of their reach. Therefore, many people had the mistaken belief that advice was not for them because it is too complex and too expensive.
Problem with no-advice
It can be argued that non-advised annuity services fulfil a useful role because they allow people who fall into the advice gap to get help when arranging their annuity. But the problem with this is that most people need lots of help before making such an important financial decision. Non-advised brokers do give their customers help but it is help from a one-handed salesperson.
I once had a client who said; “give me a one-handed adviser because you keep saying on the one hand this and on the other hand that”. He missed the point that good advice requires looking at both sides of the argument; i.e. Lifetime versus fixed term or annuity or drawdown.
Non-advised brokers can give information on both but cannot discuss which one is right for their customer because that is advice.
Another problem is that no-advice is not cheap. If you go to a popular annuity broking site and get a quote for a £ 100,000 smoker annuity you see the commission is over 3%, i.e. £ 3,000. Insurance companies do not quote commission or their profit on annuity sales but it is much more than the commission they pay brokers.
In conclusion, while there is no excuse for insurance companies mis-selling annuities to their customers, part of the blame lies in the financial landscape at the time.