Life insurance exit fees for long-standing customers need further review, says regulator

Out-Law News | 04 Mar 2016 | 5:03 pm | 3 min. read

The Financial Conduct Authority (FCA) is to further review charges paid by long-standing customers of six life insurance providers in order to ensure that those customers are being treated "fairly".

The regulator is concerned that providers did not properly inform some customers of products now closed to new business of the charges they had to pay when they exited the product or converted it to a paid-up policy. The finding follows its thematic review of firms with large 'closed books' of historic life, pension and endowment policies, which was included in the regulator's business plan for 2014/15.

The FCA reviewed a sample of historic policies sold by 11 firms, including some firms that are now closed to new business altogether, as well as some that are still writing new business but with closed-books as well. It investigated charging practices and the way in which firms communicated with their historical customers as part of the review, as well as whether firms were taking account of fund performance and policy values for these customers in a "fair and proportionate" way. The review did not address the way in which these policies were originally sold.

The regulator is now consulting on new, non-binding guidance to help firms treat these customers more fairly in future, and will work with the industry on developing a voluntary 'cap' on exit or paid-up charges on closed-book products. This new cap will operate separately from the cap on exit charges for customers of contract-based pension schemes used for automatic enrolment, which is due to be introduced shortly.

Life insurance expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, said that the FCA's findings should raise "very serious concerns" for firms.

"There are many life insurers affected by these findings and who have either closed their own products or acquired funds that contain products of another insurer which are no longer open to new business sales," he said.

"The FCA is expecting all of the life insurers who have closed-book customers, and not just those sampled, to consider these findings and make changes to meet the FCA's expectations. This will mean the affected insurers should carry out an extensive fairness review of their closed-book products, particularly the exit and paid-up charges and the communications with these customers. This review will incur additional internal and, possibly, external cost to these insurers that will most likely not have been included in the product pricing and will eat into the profitability of this business," he said.

As part of its review, the FCA sought to establish the levels of exit and paid-up charges levied by firms on their long-standing customers, and firms' communications with these customers. The six firms it intends to investigate further are those who provided it with documents where exit or paid-up charges applied. Although there were no additional charges on the majority of policies reviewed by the regulator, the FCA said that the firms "may have failed to inform customers" of charges where these were incurred.

The FCA said it had not drawn any "final conclusions" on the reasons behind these charges, how widespread the practice was or whether customers had lost out as a result. However, it may extend its investigations to other firms from the review sample or the wider firm population depending on the outcome of its further review. These further investigations will focus on behaviour after December 2008, when a package of regulatory measures based on 'treating customers fairly' took effect.

Life insurance expert Bruno Geiringer said that firms should not wait until the FCA published its planned guidance before carrying out their own investigations into their treatment of closed-book customers.

"Insurers would be well advised to treat these findings very seriously and urgently take action using a project management methodology so that a controlled environment can be established quickly in their businesses in which a proper assessment can be made as to whether these customers are receiving fair outcomes," he said. "Experienced resources that can undertake and manage such a review will be scarce and at a premium now and will be rapidly snapped up by the early movers."

The review also raised doubts about the "viability" of closed book arrangements for firms lacking the resources to properly manage them, or that were more focused on new business, he said.

"There are some specialist closed book insurers around and I would expect them now to be looking very eagerly at the possibility of picking up some of the closed books at much lower prices. This might stimulate senior management of some insurers to 'lance the boil' and let stagnant closed books go on the market for sale, leading to an expected increase in deals and insurance business transfers this year and next in order to consolidate closed books more with the specialist operators," he said.