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FCA must stop the non-advised annuity madness

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The very strange decision to allow commission to continue to be paid on non-advised annuity sales whilst banning it for advice under the RDR is looking even more bonkers given this week’s Financial Services Consumer Panel report.

There are two arguments usually given to support the unlevel playing field which now exists between advised and non-advised annuities.

The first is that the RDR commission ban was designed to combat the potential for biased advice but where no advice is being given there is not the same potential for bias.

The second is that banning commission for non-advised annuity sales would “rock the boat” too much at a time when few firms are willing to service those with small pension pots.

The FSCP’s findings show large variations in the levels of commission on offer to non-advised brokers. A potential for bias appears to be very much there. (Remember the regulator pushed ahead with the RDR commission ban on advice without finding evidence of significant bias- just the potential for it to occur).

The failure to create a level playing field between advised and non-advised annuity sales is inevitably leading to a distorted market. We’ve spoken to many advice firms over the past year or so who have set up or are looking to set up non-advised arms for retirement business.

The ability to continue to receive commission and lower regulatory overheads make it an attractive proposition- especially for clients with smaller pots where getting full independent advice may not be economical.

Some non-advised firms are offering a decent service to clients who for whatever reason do not want to pay for advice. But the different charging regimes inevitably open the door to regulatory arbitrage and the potential for decisions to be influenced by the higher profit margins available.

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One broker shared with the Consumer Panel a model outlining the profitability of non-advised Vs advised business. It more than doubles on a £100,000 pot if the enhanced quote is non-advised (see graph).

Higher margins for distributors can lead to significant disadvantages for the consumer. Alongside less Financial Ombudsman Service protection, savers may not be offered important advice needed to make an informed decision.

A key question that may not be asked is whether an annuity is the right solution at all. With complex annuity solutions, such as fixed-term and investment linked, becoming more prevalent, the risk of these types of product being “mis-bought” on a non-advised basis will only increase.

The “rocking the boat” argument does not stand up either. People aren’t getting a “free” service at the moment, unfortunately many think they are.

Money Marketing, alongside others in the media, has been pressurising firms to amend marketing which have promoted these services as free but more needs to be done.

A ban on commission should be introduced as part of a package of annuity market reforms, including mandating the use of an independent broker (proposed by Labour but rejected by the Government) and promoting higher standards.

The other alternative is the horrendously named National Default Annuities Service, suggested by the Financial Services Consumer Panel, and the inevitable inefficiencies and bloated costs that are likely to accompany a Government-led project. A market (and regulatory) led solution based on higher standards and more transparency is a far more attractive proposal.

You get the feeling that the FCA’s current review of annuities will come up with some bold conclusions. And it needs to.

At present it seems mad that the regulatory dice are loaded so much against independent advice and in favour of a way of doing things that risks so much consumer detriment.

Paul McMillan is group editor at Money Marketing – follow him on twitter here

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. @ Paul
    Personally I think bonkers is too polite. Insane and potentially corrupt is nearer the mark!

  2. I wonder if Martin Wheatley has ever read any Mary Shelley? Victor Frankenstein found it easier to create the monster than control it and in trying to pacify it went and created another monster. It all ended very badly.

  3. Another blow to Financial Services….I cannot wait for us to be out of this era of bad mouthing FS. We need more good news stories. As an industry we need to build the brand of Financial Services

  4. @Simon – You’re being to kind….. remove the word POTENTIALLY…..

  5. Agree with James, the problem is people like Billy Burrows and his loud mouth is not helping. One minute he’s all for advice, which everybody knows is the correct way to buy an annuity. The next he sells himself to non advice and now backtracks on everything he says. How can this give readers and consumers any confidence in what is right and wrong?

    The statistics into this market are appalling. For example only 50% of people buy a standard or enhanced annuity (the only products non advice can offer from their limited panel). This means that 50% of people who go to non advice are given a product that isn’t the very best suited for them.

    Shocking that this is happening, I can see a mis-selling scandal happening here as with PPI!

  6. The irony of some of the commentators speaking out against the perils of non-advised. I present exhibit A

    http://www.annuitydirect.co.uk/J365f7JdeKK7P1g/wp-content/uploads/2013/03/TOB-Guided-Annuity-Purchase-non-advised-V7.pdf

    @ Tony, don’t believe the hype as some of these “statistics” are provided by the very loud mouths you refer too. They talk about vested interests yet don’t mind making a commercial gain by providing the services as highlighted above.

  7. i am not defending the non-advised businesses, as like others i think there are some dark pools of activity, but one challenge is that the fee solution may simply drive more people to stick with the existing provider. A hell of a conundrum for regulators.

  8. I fail to see why this is now news. I, like other IFAs, have been calling for a review of this market for 2 years. It is loaded with poor service, questionable practices and outright liars. I know because I have spoke to some of them.

    Only last month a client who had spoken to 4 differing annuity brokers (2 of them big national names) was shocked to learn he qualified for flexible drawdown on his £150k pension fund. To Quote him: ‘no wonder pensions and advisers have such a bad name when nobody tells you the truth. Why has nobody else told me about this option?’ How do I answer that to a well educated professional!

    Sorry but this is all about regulatory failure and we need to get to a point where those making the rules start to listen to those actually on the ground doing the job. We can see the problems months possibly years before the regulators get even a sniff of a problem. This way the bad PR can be avoided before another scandal hits and all our reputations suffer including the FSA/FCA.

  9. Simple solution, offer both the client a fee or commission option.

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