Millions of savers who were sold pensions and other financial products in the Seventies, Eighties and Nineties are likely to be given a fairer deal after the City regulator announced it had found evidence of companies mistreating loyal customers. Here’s what you need to know.
What’s the issue?
Savers have been trapped in plans with high charges that could wipe out returns but are unable to move to another provider because of huge exit fees. The Financial Conduct Authority (FCA) has been investigating the charges, which apply to pensions, life insurance policies, endowments and investment bonds that are active but no longer open to new business, for the past two years. It believes that some insurers have been unfair to customers holding these “zombie” products, which may not be actively monitored, by failing to be transparent about the charges.
Which charges?
It is looking at exit fees, paid if customers leave a scheme, and “paid-up” charges levied when customers stop paying premiums but remain in the policy. When some customers were charged they may not have been told, while others were unable to ditch products that no longer met their needs. Exit fees can reduce a policy’s value by as much as 50 per cent if a customer wishes to switch provider, while paid-up charges can consistently outweigh any fund growth, meaning that the pot actually shrinks.
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Which companies are involved?
The regulator has been reviewing 11 companies and its enforcement division will conduct further investigations into Prudential, Old Mutual, Abbey Life, Scottish Widows, Countrywide and Police Mutual. Tracey McDermott, the FCA’s acting chief executive, says: “The practices at some companies appear to have been poor.”
Is this a mis-selling scandal?
No. Despite the fact that these policies were often sold by doorstep salesmen on commission, the FCA is only looking at how customers are treated now, not at how the policies were sold in the first place. The investigation is expected to take several months. With all six firms, the regulator will focus on the disclosure of charges after December 2008, but Abbey Life and Old Mutual are also being investigated for potential breaches of regulations in a number of other areas.
What action will be taken?
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The regulator is seeking a voluntary solution to capping or removing the exit charges, so some customers who are trapped may be able to leave bad deals with no charge while others may have the fee cut by thousands of pounds. If further problems are identified, the companies could face unlimited fines and be forced to pay compensation to customers. Matt Browne, a director at PricewaterhouseCoopers (PwC), says: “The regulator isn’t pulling any punches. The review is going to have a big impact on life assurers.”
Should I move company?
In some cases switching could make sense but if you think that you may have a policy with unreasonable terms and conditions you should show the documents to a financial adviser before taking action. Some older policies include valuable annuity rate guarantees and others may offer a large bonus if they are held to maturity. It could also make sense to delay taking action until the FCA concludes its investigation. Lee Clarke, a partner at PwC accountants, says: “My advice would be to wait. The FCA said that it will work with the industry to reach a solution and if that were to happen, someone who has such a product would be better off.”
I ’ve been ripped off. What can I do?
If you feel that you have been poorly treated or were not informed about charges you should complain to the company that sold you the policy. They have eight weeks from the date of the first complaint to respond. If the company rejects the complaint then take it to the financial ombudsman — your right to do so is unaffected by the FCA investigation.
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BEHIND THE STORY
The exorbitant exit charges that the Financial Conduct Authority, the City watchdog, has in its sights can have a horrifying effect on those who need early access to their life savings, for whatever reason.
In some cases, if a customer tries to exit before a specific age, usually their 65th or 70th birthday, a pension pot of £100,000 could be reduced to just £50,000 once the charges are applied.
Some companies were found to have levied annual charges in excess of 7 per cent that wiped out any growth that may have occurred and it is thought that in some cases these charges may have been applied to customers’ pensions without their knowledge.
Millions of workers who bought self-invested personal pensions, life insurance plans, investment bonds and endowments will have been affected, and because they have been kept in the dark, many will be unaware of their losses.
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The typical pot size today is between £15,000 and £25,000.
Tracey McDermott, the acting chief executive of the FCA, says: “It is vital that customers are treated fairly and given the right information on an ongoing basis in order to help them make important financial decisions.
“We expect all firms to take into account the findings we have published and ensure they are treating their customers fairly.”
The regulator’s move comes after the government vowed to cap exit penalties for over-55s using the new pension freedoms to cash in their savings.
George Osborne, the chancellor, announced his plan to tackle the problem in January. He warned: “The government isn’t prepared to stand by and see people either ripped off or blocked from accessing their own money by excessive charges.”
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The FCA says that as many as 2.2 million savers have early exit fees written into their pension policies. More than 870,000 savers aged 55 or over face a £1,000 penalty for trying to withdraw their funds, while 62,000 face charges of 40 per cent or more.