FCA to review whether life companies with large back books are treating long-standing customers fairly

Out-Law News | 01 Apr 2014 | 1:53 pm | 4 min. read

The UK's Financial Conduct Authority (FCA) has confirmed that it will review a "representative sample" of historic life insurance, pension and endowment policies in order to monitor whether firms are treating these long-standing customers fairly.

The review will begin soon in Q2 2014 and last 6 months according to the FCA's business plan for 2014/15 which was published on 31 March 2014.  It is not intended as a review of past sales practices or a way of applying current standards retrospectively to legacy policies, the regulator has said. It does not intend to individually review all 30 million policies within the scope of the review, and does not intend to remove 'exit fees' from these policies providing that they were compliant at the time of the sale, it said.

Life insurance expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, said that, initially, the life insurance industry was deeply concerned by press reports that this review would severely dent their revenues by attempting to retro-fit the charging structures involving exit fees in these old, long term products into a different charging system that they were not designed for.

"Since the Financial Services Authority last looked at closed funds, there have been considerable developments both in the life and pensions market and regulation," he said. "Companies with closed funds will be concerned that life and pension policy terms agreed years ago are not going to be subjected to another layer of judgement and assessed against rules and expectations today.  

"Many of the legacy products are being managed by life companies following insurance business transfers," Geiringer said. "These transfers will have included a regulatory process involving testing for fairness, protection of policyholders and in some cases an expense guarantee so the industry has some cause to throw their hands up and complain at yet another thematic review just when they are starting to recover from the shock of the announcements in the Budget earlier this month about annuities and retirement income."

Some details of the review emerged last week ahead of the publication of the FCA's business plan. According to initial press reports, the regulator was planning to conduct a "broad review" of all policies sold before 2000 and could consider banning the 'exit fees' that apply if a customer wanted to switch to a cheaper provider if this was "deemed a practical way to overcome the poor treatment of policyholders".

The FCA was forced to publish a statement on Friday 28 March 2014 clarifying its intentions, ahead of the publication of its formal business plan on 31 March. It has since announced that it will conduct an investigation into its handling of the press coverage, which will involve an external law firm.

"The work on fair treatment of long standing customers in life insurance is a supervisory piece of work," it said. "We enter into this work to gain a better understanding of how this area functions."

"As a forward-looking regulator, we want to examine areas that are of interest and relevance to consumers and to firms and assess whether there is an issue that requires any action. No conclusions have been reached as work has not started," it said.

According to the business plan, the FCA is concerned that firms with large 'back books' could be taking advantage of consumer inertia and using the "value" that they get from existing customers to support low rates and introductory offers for new customers. Long-term customers holding so-called 'legacy' or 'heritage' products that have since been closed to new members could be potentially paying more due to their inability to switch to cheaper products from other providers, the regulator said.

"This does look strange and potentially misunderstands the nature of these long-term products.  I wonder if there has been a "read-across" to these long-term policies from some of the criticisms about old bank savings accounts and cash ISAs which are often maintained at much lower interest rates than are available for newer versions of these products".     

The FCA said in its business plan: "These accounts have been closed for many years in some cases, but there are still valid issues to be looked at around the question of the service that consumers receive in relation to those accounts". Are they getting the right information? Are they getting the right level of service? Are these investments still appropriate?"

"We will be reviewing a representative sample of firms who we expect to look at whether they are treating their customers fairly," it said.

"Companies with closed funds are usually running off the policies according to a run-off plan, and in most cases the charges are fixed in the plan," said life insurance expert Bruno Geiringer. "Also, the way closed funds should operate, there should not be any cross-subsidy from them to fund the development of new products", he said.

"A few years ago, some companies looked very hard at the treatment of their legacy books and put in place new arrangements to provide for spot-free guarantee surrender periods and better documentation of policyholders' rights to withdraw funds and cancel their products. The regulator then welcomed these steps.  Perhaps in some cases now, it is possible that the quality of service has reduced, particularly if the fixed fee is not enough to pay for the service," said Geiringer.

"Service levels at product providers have long been criticised by adviser firms and perhaps some good will come out of this review by making sure providers give a good level of service and meet their promises. Firms should be reviewing that their processes are enabling them to meet their promises and indeed, this is not new," said Geiringer.

"A few years ago, the FSA, the then regulator, required firms to undertake a similar review which became known as the 'Strachan Review'. But service fulfilment will need to be paid for somehow. Although it is not known how far back the review will go, one concern could be whether these legacy policies are being administered on appropriate computer systems which have the functions for the record-keeping detail and admin capabilities required to service the policies properly today. As some providers outsource their admin, this probe will also probably need to look at arrangements with outsourcers. Having said it is a forward-looking regulator, it does seem rather strange to me for the FCA to be looking backwards at the admin of old policies," Geiringer said.