The forgotten: FCA exposes how closed-book firms have preyed on clients


The FCA’s explosive review into how firms treat investors in antiquated products has exposed the failure of the treating customers fairly regime and could spark a fresh wave of compensation claims.

The regulator’s long-awaited report into the life and pension sector’s closed-book businesses reveals the full extent of firms’ exploitation of long-standing customers.

Running in parallel with a consultation on exit fees levied on pension products, the report makes clear fair outcomes for consumers should overrule the contractual terms customers signed up to.

Among the catalogue of failures discovered by the FCA were firms holding customers to terms and conditions written decades ago which they knew to be unfair, substandard communication at key points during the policy term and often-concealed paid-up charges that consistently outweighed any investment returns.

Experts predict the regulator’s report may also inject life into the mergers and acquisitions market. Firms still open to new business may try to offload products whose profitability is likely to be hit in the event of FCA intervention, which could also result in claims by millions of customers.

Here, Money Marketing examines where providers fell short and what the impact of regulatory action will be on the industry.

Classic Al Capone

Long-standing customers in legacy products have suffered both as a result of providers’ inflexibility around contract terms and indifference to policies no longer open to the new business, the review shows.

The FCA announced its plans to delve into insurers’ back books as part of its 2014/15 business plan. These plans have been sidetracked by a bungled media briefing which was itself subject to an independent review last year.

The resulting thematic review, published last week, covered investment-based life insurance products sold before 2000 by 11 providers with around £150bn in closed-book products across 9.4 million customers.

Firms completely closed to new business, consolidators and those with a mixture of new business lines and closed-books were included in the review, which aimed to assess the level of exit and paid-up charges as well as how providers communicated these.

Six providers – Abbey Life, Countrywide Assurance, Old Mutual Wealth, Police Mutual, Prudential and Scottish Widows – will be investigated further to uncover how they disclosed charges.

However, Abbey Life and Old Mutual will undergo more intensive scrutiny to determine whether they have broken rules across a broader range of areas. The scope of the follow-up work will include products sold after December 2008.

Old Mutual Wealth, Countrywide, Prudential and Scottish Widows all say they are co-operating with the FCA’s further review. Police Mutual says if there is found to be consumer detriment they will remedy this.

Abbey Life could not be reached for comment.

Advisers say while the principle of honouring contracts is important, closed-book providers have been on a collision course with the regulator for years.

Page Russell director Tim Page says: “The biggest issue is disclosure and in that sense they are bang to rights. It’s a classic case – like how Al Capone was done for tax evasion, not racketeering.

“Every IFA in the land will have been frustrated by having clients stuck suffering massive exit penalties and poor charges in the meantime. The insurers have had a good run, they’ve been farming this money for donkey’s years. They knew it was not going to last but now various initiatives are forcing them to change.”

Fairey Associates managing director Ed Fairey says: “All providers set out charges at inception but they also reserve the right to change their charges at any time. They all give themselves that flexibility, if they have the will to remove the exit charge then of course they can do it – the fact they don’t want to speak volumes for those businesses.”

Individual personal pensions, including Sipps and retirement annuity contracts – were in scope as were whole-of-life policies, endowments and with-profit and unit-linked investment bonds. Group and stakeholder pensions, protection and general insurance were excluded.


The regulator introduced the TCF regime in 2001 yet 15 years on providers are still struggling to comply.

Rowley Turton director Scott Gallacher says: “Given that we are having to be whiter than white, I do not think it’s unfair to ask pension providers to do the same thing.

“This is a massive failure of the whole TCF regime, and the FCA must bear some blame too.”

While the FCA did not name specific firms, it reveals senior management in general “did not have a grasp of closed-book customers and outcomes” and did not review products apart from to check whether they met precise terms and conditions.

The regulator says most firms are not giving customers important information at the right time. This includes disclosure around when paid-up and surrender fees apply or the loss of benefits including guarantees.

Some customers in legacy unit-linked products were found to be unaware of the impact of capital unit charges because of poor disclosure while with-profits businesses are “not adequately monitoring the impact of the charges on customer outcomes”, the FCA says.

Firms are “particularly poor” at disclosing ongoing charges, with one provider referencing the cost of guarantees and management charges but excluding an annually inflating policy fee.

The paper adds while it found firms looking to “extract value” from closed-book customers, there was “no evidence” of “strategic intention” to take advantage of customers.

Former Which? financial services policy leader Dominic Lindley says: “This is a long-term failure of governance. You can never expect competition to work in products that are this complicated.

“It’s very welcome the regulator has published the names of the firms, but we also need to know what happens to them six months down the line. We need to know how many people will have their charges reduced, who gets redress and how much.

“Any compensation should not rely on people recalling what they were or weren’t sent many years ago. For the worst firms there should be committees formed with 100 per cent independent members.”

‘Serious concerns’

Life and pensions experts predict the regulator’s investigations will lead to market consolidation as firms decide to shed closed-book business lines if they come under pressure to cut charges and boost disclosure.

Insiders say legacy business typically contributes around 50 per cent of life company profits, while at one firm this is believed to be 100 per cent.

Law firm Pinsent Masons insurance partner Bruno Geiringer says: “These FCA findings raise very serious concerns for life insurers which have customers invested in products that are closed to new business. There are many life insurers affected by these findings who have either closed their own products or acquired funds that contain products no longer open to new business sales.  

“I suspect compensation will be a consideration as part of the next review. I suspect in most cases the charges will be in the T&Cs but the regulator will say that is not good enough.

“It’s quite controversial in some respects to say contracts can be changed but the regulator wants a wider consideration, going beyond the contractual relationship.

“The costs of running a closed book with all these reviews is clearly increasing and there may be some insurers with four or five closed funds that are not run on an economic basis. New business is the focus and they may say they can’t be both an open and closed book provider.”

But Panmure Gordon equity analyst Barrie Cornes says it is hard to predict whether closed-book will be sold to closed-book specialists or hybrid firms.

He says: “If something substantial comes out of the FCA investigation, it certainly could have an impact and increase some of the options for M&A among some of the consolidators.

“Maybe some of the potential sellers with partially closed business might be more likely to exit those businesses to avoid future issues like this and having their names splashed all over the place.”

The Lang Cat consultant director Mike Barrett warns the regulator risks hurting consumers further if it comes down too hard on providers.

He says: “There’s a balance to be struck. It’s almost exactly ten years since the TCF outcomes were published, it’s fair to say customers in the closed-book products have been failed in each of the outcomes.

“There is huge cost to unwind some of that but we’d be concerned an overly aggressive approach might negatively impact consumers – some of those products still have valuable benefits which you can’t replicate elsewhere. Indirectly, the reality is these products are extremely profitable and are keeping the businesses sustainable and if you go in too aggressively the services will deteriorate further.”

The FCA says it has not yet decided if regulations have been breached, and says it will carry out further work “to understand the reasons for these practices, whether customers may have suffered detriment as a result and, if so, how widespread these issues are.”

How the FCA got to this point

2001 – FSA publishes paper on treating customer fairly after point of sale

2004 – Dear CEO letter following with-profits review raises concerns firms are not properly reviewing current and legacy products

2006 – FSA publishes six consumer outcomes as part of its TCF initiative

2010 – With-profits report sets out the regulator’s expectations around communications, governance and the fairness of surrender and maturity payouts

2014 – Bungled closed-booked briefing sees insurers’ stock prices crash as business plan reveals thematic review

2015 – Davis review exposed regulator’s poor handling of the briefing, leading to high profile departures including former FCA chief executive Martin Wheatley

2016 – Thematic review results in six out of 11 firms referred to the enforcement division. Two firms – Abbey Life and Old Mutual Wealth – are singled out for broader investigation

Roll call of shame – How closed-book firms failed consumers

Paid-up and exit fees cut £4,000 policy to £1,500

The regulator assessed a policy worth £4,350 in 1992. The customer stopped contributing and the annual management charge increased by 6 percentage points to 7.25 per cent. In 2014 the policy was valued at £3,300 but was reduced to just £1,500 when an exit fee was applied as the customer transferred the same year.

Provider unaware of customer retention targets

In one case a firm’s service level agreement with an outsourced third party contained a target to retain a certain proportion of customers who expressed an interest in surrendering their policy. Another gave information focused on the advantages of keeping the policy rather than a balanced conversation around the customer’s needs.

Communication breakdown

In some cases, investors did not receive tailored communications for several years, or even the entire life of the policy. Firms made it harder for customers to understand the impact of investment management charges and premiums on overall returns by omitting customer contributions. Other providers stopped sending regular statements to customers who became paid-up.

Expert View

We need action on the insurers milking loyal customers 

In an entirely predictable way, the FCA’s thematic review has concluded some insurers treated their most loyal customers in their back book products as cash cows to be milked with high charges.

You will have heard the long trotted out excuse that the exit charges are needed to recoup the expenses of selling the pension or investment policy. But the FCA found firms generally had little understanding whether the charges were still needed to recover this money.

Poor quality statements were sent out and some firms failed to communicate charges clearly. Executives who had sub-contracted out the administration of their customers’ policies had decided it was not their problem anymore.

Fundamentally, the mistreatment of customers is about a failure of governance and a failure of the FSA’s regulatory regime. Too many firms had taken a box-ticking approach, by checking whether the charges they were trying to get away with were in line with the small print of the terms and conditions.

These governance structures lack people within the companies with the mindset and sufficient resources to rigorously defend the interests of customers. Firms assured the FCA through various committees they considered the interests of closed-book policyholders, but the FCA was unable to find much evidence of this.

It is good the FCA has named the firms involved – but this needs to be followed up with action. Instead of allowing this thematic review to fade into the background by stitching up backroom deals with the companies, the FCA should provide quarterly assessments of progress, listing any changes made and the amounts paid back to customers. Redress must be proactive – the last thing everyone wants is another bonanza for the claims firms.

Dominic Lindley is an independent consultant