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Nic Cicutti: Otto Thoresen should save his anger for his members


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



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There are 8 comments at the moment, we would love to hear your opinion too.

  1. If the FCA is really interested in righting historic wrongs perhaps it should turn its attention to the LAUTRO fictitious charges fiasco.

    From 1988 to 1994 the charges shown on every investment or pension illustration were not reflective of that companys actual charges but were those required by LAUTRO. Only three out of over sixty insurers had charges at or lower than the LAUTRO figures and this meant that the vast majority of illustrations were wrong from outset. In particular it meant that endowments were badly off course from the outset which in itself created much of the ‘compensation’ paid in latter years.

    The villain here was LAUTRO which was overseen by the SIB. The SIB phoenixed into the PIA, then the FSA and now the FCA. So the investigation should be quite an easy and cheap affair as the investigators can interview themselves.

  2. Michelle Airey 3rd April 2014 at 3:40 pm

    They would Alan Lakey but half of those responsible took early retirement on gold plated final salary schemes in between the changes so we’ll now have to overpay external consultants to do it for them.

    Unfortunately the over paid consultants are probably the other half of those responsible who’ll get double remuneration as a result the first fiasco whilst we pay for the post regulator gold handshake they received for their new rule.

    What is it they say, many a true word spoken in jest? I was once young and cynical too 🙂

  3. Speaking of young and cynical, what on earth has the website revamp done to Nic Cicutti’s face?

  4. It’s interesting that Nic should use the increase in charges on regular premium pensions stopped in the first year.

    I’m not an apologist for insurers (Harry please take note) but let’s contrast that with what would happen now.

    A client wanting advice on regular contributions to a pension would be charged a fee by the adviser. For smaller contributions a fair fee may well amount to more than the first years contributions. The adviser may even suggest they don’t bother right now (but advice given and fee paid). If they then commence the payments and stop within a year are they better off?

    On the plus side at least the charges are open and transparent and perhaps that’s the most important thing. It gets my vote.

  5. Soren Lorenson 4th April 2014 at 8:50 am

    Whilst I kind of agree with Nick here, in that those legacy policies, especially the ScotEq ones, should frankly be illegal. I think what Otto is unhappy about is the way that the review was announced in such a stupid way and with such catastrophic effects.

    Many of those rip off pension funds will have large investments in companies like L&G and Aviva so, thanks to the FCA, those policyholders have now suffered twice.

  6. Bloody hell Nic did you have a bad nights sleep ?

  7. Good points ‘Grey Area’…

    I’ve only ever operated in a Stakeholder type world but I feel it’s dangerous to look back with hindsight.

    Comparing the cost of old contracts to modern plans is apples and pears. Back then (I can only suspect!) there was no IT, no online submissions, a man round the corner who picked up the ‘prop’ (I hear in the halcyon days they would sit in the pub on a Friday??), the provider would remunerate a sales force, do everything themselves, and everything would be slow and on paper.

    Now, the IFA does all the work, charges a fee and the contracts (typically) are ‘clean’.

    Plans now are priced based on the world today – yet we still hear that pensions are ‘rip offs’. I also suspect that most IFA firms do not recive the service from providers that we expect – whether it’s the fact every time we call ‘there’s a high volume of calls’, when we go online the system often fails, or when we want to speak to someone in person they are different to the last person we met.

    Therefore can companies who priced contracts based on the world (and their costs) at the time be expected to wipe the slate clean? Furthermore, can we expect those charging significant MVRs to waive them too?

    I suspect the answer is no – although I genuinely wish it was yes – though if this does happen, I’m sure the shareholders in the consolidators will be very disgruntled.

  8. I agree with Gray area and Paul stocks. I would however argue that the cost of the old systems and metjods being higher than today, surely they priced in the cost of those older systems at the time and now are failing to provide either the old heavy on labour method OR the more cost effective telephone and internet based system either so they are charging under false pretences for a service which is no longer as originally designed and paid for when the plan was set up.
    So I agree the contracts shouldn’t be rewritten by the FCA with the benefits of hindsight, but NOR should the Zombie providers be able to charge this level of fees for a reduced service which is no longer even as good as what was promised when the plans were set up.

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