On 26 May, the Financial Conduct Authority (FCA) published a policy statement on implementing information prompts in the annuity market. The FCA had consulted on this topic in November 2016, following a number of findings in its Retirement Income Market Study (published in 2015), which concluded that the retirement income market was not working well for consumers.
The FCA has confirmed that it will require all firms offering guaranteed quotes on annuities to retail clients to provide information prompts as part of pre-sale disclosures, in a prescribed format, by 1 March 2018. The prompt will apply to all types of annuity sale including internal, open market and panel sales. The FCA will require firms to generate a market leading pension annuity quote before providing a guaranteed quote to a retail client. The prompt will have to show the difference between the provider’s own quote and the highest quote available to the consumer from all other providers on the open market (determined using comparison tools). Where the firm is offering the highest annual income, they must include a statement to that effect in the prompt.
Importantly, however, firms will not be required to offer quotes that reflect the customer’s health record or lifestyle, i.e. an enhanced annuity. Concerns have been raised by the industry that the measures could result in customers being misled into believing a competitor’s quote was the best available and not understand that an enhanced product could pay a higher income still. The FCA will not require firms to conduct a detailed search based on information regarding a customer’s health and lifestyle. Nor, importantly, will they be required to obtain a quote on an enhanced basis. Rather, the prompt must only include information about how a customer’s health or lifestyle may entitle them to an annuity that pays a higher income.
Below we summarise the key details that must be included in the prompt, the main changes to the rules since the consultation and how the reforms will affect firms.
What key information must be provided in the information prompt?
The information prompt provided by firms must set out the following key information.
- The amount used to purchase the annuity
- Whether the annuity is single or joint life
- Whether payment is in advance or in arrears of the start date
- Whether the income paid by the annuity is guaranteed for any period
- Whether the income will increase in line with inflation or some other specified rate
- The provider’s own quote
- How to shop around (i.e. the telephone number and URL for the Money Advice Service)
What has changed since the consultation?
- The inclusion of a clear and prominent warning about enhanced annuities: the FCA has amended the information prompts templates so that they each include a clear and prominent statement that customers might be eligible to purchase an enhanced annuity. The statement reflects the key questions which, if answered in the affirmative, are likely to result in the customer being eligible to purchase an enhanced annuity. This requirement does not mean that firms will have to inform customers about how much they could gain from an enhanced annuity compared to an ordinary annuity. Furthermore, firms will not be required to ask customers detailed questions which may determine their eligibility for an enhanced annuity.
- Firms that engage with consumers over the telephone will only have to provide the information prompt in relation to the specific guaranteed quote that a consumer has indicated they would like to proceed with, as the FCA considers this measure gives the consumer the benefit of the information prompt while reducing the risk of disengagement. The FCA envisages that information prompts over the telephone will result in calls lasting less than ten minutes longer than they do currently. The FCA has also made clear that where a consumer, during a telephone call with a firm, requests a guaranteed quote to be provided in writing via post or email, firms should provide this in a durable medium.
- The FCA has maintained its position that where an intermediary firm is used by a consumer, both the intermediary and relevant annuity provider must provide information prompts. The FCA has clarified that its final rules mandate that where an intermediary firm is used by a consumer, the intermediary firm is able to rely on the information prompt given by the annuity provider if it is satisfied that it is appropriate to do so.
- Firms must now implement changes to ensure compliance with the FCA’s requirements by 1 March 2018, rather than 1 September 2017 as set out in the 2016 FCA consultation.
Implications for firms
The FCA’s reforms will require significant changes to the way firms operate. Clear concerns have been expressed by the industry that consumers could be misinformed as a result of these changes. One risk is that customers may receive inconsistent quotes because of firms using different underwriting approaches. Concerns have also been raised by industry and consumer protection groups that the FCA’s requirements will not result in better outcomes for customers who might be eligible for enhanced annuities.
The reforms will, however, necessitate investment by firms both on an up-front and ongoing basis (see FCA cost benefit analysis in the policy statement). The FCA now expects, for example, that firms will have to pay £1.88m upfront for retrieving quotes from the open market and £8.65m on updating existing product disclosures. Firms will have to assess for themselves how much complying with the rules is likely to cost.
Firms should give careful consideration to the competitiveness of their offerings, to prepare for a potential increase in shopping around. Firms should also ensure that they are able to use appropriate comparison tools or software in order to provide reliable comparisons for the information prompts. Investment in new training for staff is also likely to be needed, to guarantee staff are aware of the changes and that information prompts are provided at the right time (particularly during telephone calls).
The FCA has indicated that it will keep some areas of its reforms under review: for example, it has said it could consider mandating firms to provide information about where the highest quote can be obtained, if there is evidence that a consumer’s ability to access the highest quote available is inhibited by the lack of information about the firm that can provide it. There may, therefore, be further changes to the FCA rules in the future and firms must be mindful of this. In the meantime, firms will have to invest considerable time and resource in preparing for implementation of the new rules by 1 March 2018.