Life insurance newsletter: Issue 14 - FINRA - Rules and Regulations

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Adviser charging – the choices facing insurers In November 2008, we published a feedback statement on our Retail Distribution Review (RDR) containing a package of proposals for the investment market (http://www.fsa.gov.uk/pages/Library/Policy/DP/ 2008/fs08_06.shtml). Our proposals include consulting on introducing adviser charging. Under our proposals, insurers would not have the option to pay adviser firms any other commissions (e.g. shares of product charges, or rewards for placing business through a platform) and adviser firms will have to charge the consumer the same amount for their services, regardless of which particular product provider they recommend. This leaves insurers with important decisions to make. Some firms may want to offer facilities for deducting adviser charges from investments and will therefore need to make changes to their systems. Others may choose to let adviser firms make their own arrangements to collect charges (potentially involving third parties like platforms) and will be working out what they need to do to create commission-free products. Perhaps most importantly of all, insurers will need to think about how they will compete for business in future with competition focused so clearly on the consumer and not the adviser. In the coming months, we will be drawing up detailed proposals for consultation. Through thinking about and planning their own business responses to the RDR, we hope that insurers will also be in a position to provide us with wellinformed responses to our consultation in June. Pensions and Treating Customers Fairly (TCF) Pensions have a crucial role to play in the lives of all consumers and, as part of our focus on TCF, we have carried out several reviews of standards in this area. Open Market Options – provider literature and delays in transfers The decision on whether to buy an annuity from a current provider or to switch from another insurer on the open market can influence an individual’s lifetime income. Poor communications from insurers may result in people making poor decisions or failing to take any action to maximise retirement income. Page ◆ 2 A review of the quality of annuity provider literature and alleged delays in the transfer of annuity funds in 2008 found some good practice, but also that many firms needed to make improvements to ensure that pension customers were being treated fairly. Individual feedback was given to all firms involved in the review and some firms were required to carry out remedial action by the end of 2008. We have been encouraged by the positive response from firms, all of whom completed their remedial work within the deadline or are on track to meet individual targets agreed with their supervision team. We also note the good progress made within the ABI’s ‘Options’ initiative in rationalising and speeding up the OMO payment process, to the significant benefit of pension consumers. We are encouraged by the number of firms that have joined this initiative, but note that there are still some firms that have yet to participate. We urge all provider firms active in the personal pension market to join in this process and adopt the new improved transfer procedures. Quality of advice given to customers switching into a personal pension or self-invested personal pension (SIPP) Switching into personal pensions and SIPPs from existing arrangements can be an appropriate option for many people, but this is a complex area where consumers rely heavily on advisers. We are currently taking action to improve the quality of advice given to consumers following a review that found variable standards across a sample of 30 firms. We have written to over 4,500 firms that advise on pension switches, setting out our findings, the standards we expect and the action firms should take to ensure consumers receive suitable advice. We will undertake further assessments in the third quarter of 2009. Firms that fail to ensure customers receive suitable advice will face further action. According to the review, the main causes of unsuitable advice were: • switches involving extra costs without good reason; • recommendations that did not match the customer’s attitude to risk and personal circumstances; • failure to put in place or explain the need for ongoing reviews when these were necessary; and • loss of benefits from existing pension schemes without good reason. You can find more information on our website: http://www.fsa.gov.uk/pages/Library/Communication/ PR/2008/147.shtml. This is not FSA guidance.
Quality of advice for customers contracting out of the State Second Pension or transferring existing National Insurance rebates from a personal pension into a SIPP Since 1 October 2008, people are able to contract out of the State Second Pension into a SIPP and transfer existing National Insurance rebates (protected rights) from a personal pension into a SIPP. As with all advised transactions, we expect firms to ensure that any advice is suitable and based on an assessment of customer need, which involves: • determining whether there is a genuine need for the investment flexibility and control associated with a SIPP; • a clear explanation of the costs involved; and • how the recommendation meets a customer’s needs and attitude to risk. We have published a policy statement confirming that when advising on contracting out into a SIPP, firms will also need to provide a comparison of projected retirement income from the SIPP against potential benefits from the State Second Pension. You can find more information on our website: http://www.fsa.gov.uk/pages/Library/Communication/ PR/2008/109.shtml. An update on unfair contract terms – using ‘indemnify’ in pension wake-up packs In November 2008 we published an undertaking relating to terms in a pension wake-up pack in which the term ‘indemnify’ was used. We thought that asking consumers to indemnify firms was unlikely to be fair because we did not think that most consumers would understand the meaning of the term. The Office of Fair Trading has previously expressed its view that the word indemnify ‘…if understood at all, is likely to be taken as a threat to pass on legal and other costs incurred without regard to reasonableness’. In addition, we were concerned that the term did not explain what costs the consumer was indemnifying the firm against. The conditions were drafted so broadly that it was not clear to us that the firm would only hold consumers responsible for losses or costs it incurred if those losses were directly attributable to the consumer’s carelessness or dishonesty. You can see the undertaking in full on our website: http://www.fsa.gov.uk/pubs/other/ undertaking_abbeylife.pdf. We expect all firms to have fair terms in their standard contracts with consumers. To have fair terms, firms need to comply with the requirements of the Unfair Terms in Consumer Contracts Regulations 1999 and the principle of TCF. We expect firms to proactively review their contract terms and we encourage all firms to review other firms’ published undertakings and consider their own contracts in line with them. Policy developments New modification by consent (INSPRU 2.1.22R) available to insurance firms with exposures to entities which have HM Treasury as a common shareholder The recapitalisation of several UK banks by HM Treasury and the nationalisation of Northern Rock and Bradford and Bingley have led to questions about whether insurance firms with exposures to entities which have HM Treasury as a common shareholder should be treating these entities as being closely related for the purpose of applying the counterparty limits in the above rule. Having considered this issue, we have concluded that there may be uncertainty over the application of the current rules and whether these do indeed deliver their intended purpose in the current situation. In response we have prepared a rule modification that will enable insurance firms with exposures to entities which have HM Treasury as a common shareholder not to have to treat those exposures as being to a group of closely related counterparties. If firms want to take advantage of the modification by consent described here, they should email centralwaiversteam@fsa.gov.uk. More detailed information about the waiver can be found at: www.fsa.gov.uk/pages/Doing/Regulated/Notify/Waiver/ Consent/inspru2122.shtml Prudential requirements for insurers – amendments to FSA returns The insurance prudential sourcebooks have been updated with effect from 31 December 2008 by FSA 2008/66 Prudential Requirements for Insurers (Amendment No 3) Instrument 2008 (http://fsahandbook.info/FSA/handbook/LI/2008/ 2008_66.pdf). The amendments to IPRU(FSOC) and IPRU(INS) apply to all FSA returns for financial years ending on or after 31 December 2008. This is not FSA guidance. Page ◆ 3
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Life insurance newsletter: Issue 14 - FINRA - Rules and Regulations

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