Slowly but surely, the Financial Conduct Authority (FCA) is wrapping a protective blanket around the pension freedom reforms.
From the £30,000 advice requirement for defined benefit to defined contribution transfers, to the ‘second line of defence’ provider risk warnings and a renewed focus on wake-up packs, the mood music from the regulator is clear – consumer protection is now front and centre.
When I last spoke to the FCA’s director of strategy and competition, Chris Woolard, he told me policing the market for trading annuities would be “just as complex” as the pension freedoms “with a number of issues added on” – namely, that people will be swapping a guarantee for cash (or moving into drawdown).
So ensuring consumers are adequately protected is entirely sensible.
In brief, the FCA has proposed:
- Requiring savers who wish to cash in an annuity above a certain value to take regulated advice. This level will be set out by the government in the Bank of England Financial Services Bill at a later (yet to be determined) date.
- Mandating that those who wish to sell their annuity to their existing provider must either take advice or visit a non-advised broker first.
- Introducing mandatory price comparison to the market, forcing buyers and brokers to show savers what price they will get (net of costs and charges) compared to the value of the annuity on the open market.
- Banning commission payments from providers to non-advised brokers in the secondary annuity market. Brokers will instead be required to agree a fee with the client, disclosed clearly and paid upfront or from their annuity pot.
This final rule appears to sound the death knell for commission in the non-advised market. The continued existence of commission payments for annuity brokers has rightly irked advisers since the RDR forced clear, transparent pricing on the rest of the industry. As has been highlighted many times
The continued existence of commission payments for annuity brokers has rightly irked advisers since the Retail Distribution Review forced clear, transparent pricing on the rest of the industry. As has been highlighted many times before by the excellent Billy Burrows, among others, these payments are often as much – if not more – than the cost of paying for regulated financial advice.
I’ve spoken to colleagues, financial advisers and others in the industry and have yet to hear a reasonable explanation as to why commission is acceptable when someone buys an annuity through a broker, but not when they sell one. Its continuing existence muddies the charging waters and leaves the entire industry open to criticism. The FCA should not delay abolishing commission altogether until April 2017 – it should do it now.
Aside from regulation of secondary annuities, we have broader concerns about how the market will operate and the potential for consumers to get ripped off twice – once when they bought their annuity, and again when they sell it. It’s possible the same provider will be fleecing the same saver – not exactly the kind of headlines the industry needs.
The government estimates 300,000 annuities will be cashed in, raising the best part of £1bn for the Treasury in the first two years in extra tax revenues. However, this is likely to be a fire sale as those who feel they got poor value in the old world rush to exit their contracts.
Tighter regulation and the advent of pension freedom should mean fewer people are being ripped off today, so the number of savers wanting to trade in their policy will also inevitably drop off. It’s therefore highly debatable whether a sustainable market will develop in such an environment.
Furthermore, the prospective buyers have yet to show themselves, while advisers I have spoken to have no intention of facilitating this business given the risk of future Ombudsman claims, particularly in relation to insistent clients.
Given all this uncertainty, the Treasury’s aim of having the market up and functioning in 11 months’ time looks at best ambitious and, more realistically, a pipe dream.
Tom Selby is senior analyst at AJ Bell