Otto Thoresen is an angry man. Or, at least, he is a determined man. Last week, the director general of the Association of British Insurers called FCA boss Martin Wheatley and told him he should be considering his position as head of the regulator.
According to the Financial Times, the cause of Thoresen’s ire was the way the FCA allegedly messed up an announcement of its investigation into life insurance policies written many years ago.
Last week, following comments made to a newspaper by FCA director of supervision Clive Adamson, there were widespread media reports that the regulator was planning a wholesale investigation into more than 30 million policies sold from the 1970s to the end of the 1990s.
The immediate consequence was that share prices in companies with a high proportion of such policies on their books plummeted.
In early trading last Friday, Resolution dropped more than 15 per cent, Aviva was down 7.3 per cent and shares in Legal & General fell 6.2 per cent. Standard Life, Prudential and Just Retirement also suffered, with shares down by around 3 per cent before recovering later in the day.
The recovery in share prices was helped by a rushed-out clarification from the FCA to the effect that, despite Adamson’s comments, the probe will not be as far-reaching as had been feared by the industry. Its main focus will be on whether policyholders are being treated unfairly, in terms of either service or charges, by virtue of insurers prioritising new business at the expense of old products. In particular, the FCA wants to know whether old policies are being used to subsidise lower margins on products for new customers.
A terse statement by the FCA made it clear: “We are not planning to individually review 30 million policies, nor do we intend to look at removing exit fees from those policies providing they were compliant at the time. This is not a review of the sales practices for these legacy customers and we are not looking at applying current standards retrospectively – for example, on exit charges.”
If this last announcement is correct, it means that any investigation will not look thoroughly at how insurers came up with charges that, by any standard, were an utter disgrace.
As I wrote in Money Marketing more than two years ago, over at Scottish Equitable – where our Otto cut his teeth as a trainee actuary in the late 1970s and where he occupied senior management roles from 1994 – the company’s personal pension charges increased when contributions stopped or reduced during the lifetime of a policy.
Astonishingly, ScotEq’s so-called specific member charge in fact increased in percentage terms even when policyholders tried to raise their contributions – in effect penalising those who wanted to save more towards their retirement.
At Skandia, the company applied a “contribution servicing charge” for policyholders who reduced or stopped their payments. Abbey Life, previously owned by Lloyds Bank and now part of Deutsche Bank, charged an extra 6 per cent of a fund’s value if the pension was halted within a year of starting, reducing to 1 per cent in year six.
Throughout the 1980s and 1990s, these types of charging structure were rife. Policyholders who bought into the government and industry mantra that they should be taking more responsibility for their retirement were conned into taking out personal pensions where vast chunks of what they paid in were syphoned off in charges. As a result, the value of their retirement funds will be hugely lower than it should have been, certainly than if they had more modern contracts where fees are within vaguely sensible limits.
Interestingly, my comments about charges in MM two years ago were in response to a report in this paper that Thoresen was promising his organisation “will look into the impact that exit fees are having on old pension plans”. It should hardly surprise anyone that in the two years since, nothing has happened. As with annuities, where repeated criticism of industry practices has failed to budge insurers, the ABI prefers to ignore the problem despite evidence of massive financial harm being caused to millions of policyholders.
Contrast this inactivity with the amazing speed of Thoresen’s response to the FCA’s botched intervention last week: angry phonecalls to the regulator and demands for Wheatley’s head.
Despite the FCA’s attempts to mollify Thoresen and his ABI mates – allowing his members to keep bleeding their policyholders dry by imposing massive charges on older policies – he is still not a happy man.
The FT reported that the ABI is “considering escalating the situation by writing to George Osborne, the chancellor, to complain about the FCA although it has not yet decided to take this step”.
The FT added that insurers are “willing to allow an investigation by an external law firm [into the way the story surfaced], promised by the FCA, to run its course”. Which is, as we can all agree, pretty generous of them.
Meanwhile, for policyholders still facing debilitating pension charges and unable to transfer their funds out because of huge exit penalties, life carries on as before. Truly, the ABI has done itself proud again.
Nic Cicutti can be contacted at firstname.lastname@example.org