Consumer Panel research shows improvements needed in consumer advice and governance of closed life funds

19 September

The Consumer Panel today calls on the FSA and the industry to ensure all customers in closed and ‘quasi-closed’¹ with-profits funds have access to advice and that ‘independent’ representation of policyholders’ interests in the financial management of these funds is genuinely independent of the company board.

These are two key recommendations of  “Are customers in closed life funds being treated fairly?”2 – an independently researched report published today by the Financial Services Consumer Panel. The research identifies about 8 million3 with-profits customers who are unable to get independent advice on their with-profits policies because their funds are too small to generate an economic commission for advisers for the complex work involved. Advisers may also be reluctant to review policies because they fear future allegations of churning.

The Panel urges the FSA to consider introducing some form of limited or focused advice for with-profits policies. This could be made available through specialist individual firms and trade associations, for example. Insurance companies could support this initiative by making with-profits review tools available to advisers on their websites. Several providers have already taken this welcome step.

There is a particular concern that proprietary companies running closed with-profit funds may not always act in the best interests of their policyholders. Although since 2004 the FSA requires an independent voice to represent policyholders, such as a with-profits committee, the Panel's research showed that 60% of these committees have no independent members but use directors of the main board of the company or individuals closely associated with the company, for example non-executive directors and former directors. The Panel would like to see these committees with a majority of members entirely independent of the board.

The report also questions whether the with-profits fund is always being used in the best interests of policyholders. The research found that companies could use this capital to fund new business development, pay shareholder tax and settle mis-selling claims.

Another important area that requires urgent action is insurance company administration. The report examines the delays advisers and their clients experience when they try to get essential information about a policy from the provider in order to undertake a review, exercise the right to use a market value reduction-free exit period, the open market option (OMO), and the sale of a policy in the traded endowment policy (TEP) market. These delays can cause customer detriment, the report states. The Panel believes that efficient administration should be part of any assessment of Treating Customers Fairly (TCF). It also criticizes the too often incomprehensible documents customers receive about important changes to their policy – for example on closure or consolidation. This denies customers the chance to make informed decisions.

The Panel is calling for the following action:

• On the provision of advice, the FSA and industry should work together to provide some form of limited or focused advice on with-profits policies through companies or trade associations assisted by life companies. They could also provide with-profits review tools on their websites for advisers to use;

• Communications from companies should not assume that policyholders have access to independent advice and should include all material facts written clearly so policyholders can understand and act on the information;

• A truly independent with profits committee seems to be the right mechanism for proprietary companies to achieve fair representation of policyholders’ interests.

• More research is required in this important area.

John Howard, Chairman of the Financial Services Consumer Panel said:

"These are complicated products that consumers had little chance of understanding.
Despite the work done by the FSA to regulate this sector, many consumers remain suspicious and worried. The information sent out by firms is too often incomprehensible and it is almost impossible for most people to get advice about their policy. Consumers feel locked into these products by MVRs, which, understandably, they regard as penalty charges, while the so-called ‘independent’ committees meant to protect consumers are often packed with company men. Not surprisingly the closure and sale of with profits funds, even though some have performed well, has been accompanied by a rising tide of consumer discontent. "

1.Many ‘open’ funds are in effect closed to new business and in run-off but have not implemented the customer protection process associated with formal closure.

2. "Are customers in closed life funds being treated fairly?" Report for the FSCP, prepared by The Pensions Institute, Cass Business School and IFF Research Ltd.

3.See notes to editors 1 and 2 for statistical background

Notes to editors

1. The calculation of 8 million people disenfranchised from financial advice is an approximate minimum based on ‘small’ policyholders, which we define as those with policy values of less than £5,000.
   
   • An FSA May 07 post-sales report concluded that there are around 8m ex-industrial branch with profit policies still in force. (Note: it is important to distinguish between policies and policyholders, as some customers may have more than one policy.) IB policies, sold door-to-door in the past, tend to have a very low value and few of these customers would have multiple policies. A cautious assumption is 7m ex-IB policyholders.
   
   • The research concludes around 2.6m people used an 'appropriate' personal pension (APP) to contract out of Serps/S2P for a few years and then contracted back in, with a resulting with profit policy of around £5,000.In addition there will be low-value lapsed personal pensions – possibly 1.8m but some of these may be APPs
   
   • To avoid double-counting of policyholders, the total of 7m + 2.6m ex-industrial branch and APP customers has been reduced to 8 million.
   
   

2. A policy value of £5,000 or less is considered ‘small’, particularly if there are no other assets on which the adviser can advise and be remunerated. If an MVR is applied this would reduce the fund value and the commission further. Typical initial commission for a new unit linked policy is about 3%, and therefore worth £150 for a £5,000 transaction. Many policyholders have funds of £1,000 or less so commission for a sale would be about £30. Importantly, the commission is only paid if the (complex) with profits review process reveals that the customer would be better off transferring – if the customer stays put, the adviser receives no remuneration for the work.
   

3. The FSA established the independent Financial Services Consumer Panel in December 1998 to advise its Board on the interests and concerns of consumers and to report on the FSA’s performance in meeting its objectives. The Consumer Panel has statutory status.
   

4. The emphasis of the Panel’s work is on activities that are regulated by the FSA, although it may also look at the impact on consumers of activities outside but related to the FSA’s remit. More information about the Panel's work is available on this website.
   

5. The Consumer Panel brings together a wide range of relevant experience. This includes financial services regulation, working with vulnerable consumers, consumer protection, consumer education, front-line money advice, legal expertise, competition policy, public policy analysis, market research and media.
   

6. There are currently twelve members of the Panel as listed below.

   John Howard (Chairman)
   Adam Phillips (Vice Chairman)
   Kay Blair
   Michael Chapman
   Stephen Crampton
   Caroline Gardner

   Jenny Hamilton
   Tony Hetherington
   Nick Lord
   David Metz
   Lindsey Rogerson
   Carol Stewart