The FCA is considering capping or banning commission on non-advised annuity sales as part of a raft of options to tackle potential consumer detriment.
In its consultation paper on pension freedom rule changes, published today, the regulator says concerns have been raised that commission on non-advised annuities could exceed the cost of advice.
It says while it is not looking to change the rules now, it wants to talk to the industry about how to tackle the issue.
Data from the Association of British Insurers shows that around 189,000 annuities were written in 2014, of which 132,000 were sold without advice. Annuity sales have since plummeted following the pension freedoms Budget announcement.
The FCA says it will assess the need to collect more data on whether consumers are paying more in commission than they would for advice.
In the meantime, it has set out three options for dealing with the risk of bias in non-advised annuity sales, whether advice is available, and the level of commission charged.
The first option is to improve disclosure of the cost of commission and the impact that has on annuity income. But the FCA says firms already have to disclose commission, and stressing commission might take the focus away from other factors savers need to pay attention to.
The second option is to restrict non-advised commission, either through an outright ban or a cap.
The regulator has raised concerns that while this option would address concerns about the cost of non-advised annuities versus the cost of advice, there could be a ‘significant impact’ on competition.
The FCA is also concerned that a cap would mean firms pricing up to the maximum level of the cap.
The final option is to improve competition, but the FCA did not provide more details about what this would look like in practice beyond “further work into the operation of the market”.
The FCA says: “While concerns have been raised about the potential for customers to pay more in commission than they would have paid for advice, it is important for us to understand the resulting consumer outcomes in each case.
“Evidence from the pension market study indicated that there have been instances in which consumers procure annuities from the pension accumulation provider without shopping around. This may lead to the customer purchasing an annuity that is not competitive from a pricing perspective. In these circumstances, the consumer may have achieved a more competitively priced product from a non-advised broker even taking into account the cost of the commission.
“We recognise that there may be benefits in exploring these outcomes in more detail and will assess the potential need for additional data collection to analyse these issues following the review of responses to this paper.”