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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


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There are 20 comments at the moment, we would love to hear your opinion too.

  1. Then wheels of justice may grind slow, but this is ridiculous. I see nothing concerning the consolidators – particularly Phoenix. Anything to do with the fact that one of their big bananas is an ex Big Banana regulator?

    It isn’t only the unfair terms, but the purposefully obstructive and awful administration that does so much to disadvantage clients.

  2. 35% MVR’s from the ‘Company that rose from the flames’. Disgusting, we need LEGISLATION George! SAME FOR PROTECTED TAX FREE CASH…..and George, please do not mess it up next Wednesday…………dispense with the LTA, now that you have corralled all of the ART and HRT payers, else you are TAXING GROWTH which is unfair even by Govt standards.

  3. 2001 to 2016, 15 years and still no where near the finishing line !

    Slowly slowly catchy monkey

  4. As I’ve asked many times before, isn’t the core issue here certain providers exploiting woolly contract terms and exercising unreasonable discretion (on which the regulator is entitled to impose standards of decent practice) or are they (the providers) merely adhering to explicit contract terms which, however unattractive they may appear to be by today’s standards, the regulator should not be permitted arbitrarily to overrule 20 or 30 years down the line? There’s no Statute of Limitations on contract law is there? After all, the Law is supposed to be the Law, is it not? It’s not something with which the regulator is entitled to play fast and loose retrospectively. Then again, it’s plain that the regulator has scant regard for the Law, as demonstrated by its complete disregard for the Statutory Code of Practice for Regulators. The regulator’s stance appears to be: Oh, that applies only to other people, not us. The Law is supposed to apply to everyone, not just to some but not others. Then again, if no body makes any attempt to enforce the Code, it’s hardly surprising that the FCA has managed to get away with having granted itself a unilateral opt-out. And why does the TSC act as if it’s not even aware of the existence of the Code?

  5. Keep the LTA for Defined Benefit Schemes only

  6. Apart from the closed book issue, there is also the one where reversionary bonuses are conveniently overlooked for 15 years in an attempt to counterbalance misguidedly high GAR promises.

  7. Whilst I do not take issue with historical contractual terms (I am locked within one myself); my biggest grievance with some providers (and I reported this to the FCA way back in the early 2000’s and note that a couple are still not on the above list to be investigated!) was the way in which some with-profit fund holdings were transferred into Cash for several years following the equity market downturn which saw terminal bonuses and non-guaranteed bonuses decimated. Policyholders were then effectively held to ransom, as mentioned, by way of significant MVR’s which were never going to reduce, due to the nature of the underlying investment structure being within Cash and not balanced across other asset classes, such as they had been prior to the downturn.

  8. We have had a case where a client went to FOS a few years ago and the complaint was rejected even though we argued that under TCF the provider had failed to disclose charges and costs. Would a similar complaint be upheld now? Have principles been laid down under past decisions and are they binding in future cases or have the interpretation of the rules changed? Indeed are past FOS decisions compatible with what the FCA are saying now?
    This is one problem with the TCF regime in that it is principles based and therefore open to interpretation. I wonder if some principles and guidance have been laid down by FOS or whether past judgements by FOS can be revisited, used as “case law” etc.

    • Hi Sam, I think this is a real problem, in that the financial services arena, changes so rapidly, crikey, what we did last week could be vastly different from what we do next week ! let alone what was going on 5, 10, 15 , 20 years ago we cannot, or FOS cannot, be judging (IMHO) historic cases on today’s standards, is it, pin the tail on the donkey ?
      Lets face it we are at risk (some may argue) more by having to change direction or altering course, so quickly, mistakes will be made and they may be big !

  9. Retrospective Regulation at its best under a different name. The charges were what they were and written in contract. The FCA may well not want to try going doing the road of trying to retrospectively change contract law but they are doing the same by accusing the providers on not TCF. This is to be done via the back door by some wooly “oh dear you have not been transparent” therefore we say you are not TCF so cough up hundreds of millions in compo to your customers.
    This bunch of parasites (the Regulator) will never be satisfied until the entire industry is brought to its knees and implodes. If the figures being stated in terms of percentage of profits being derived from this back book of business are true, that implosion will not be too far off. Still it’s only a loss of tax, loss of probably many thousands of direct and indirect jobs, so why would the FCA give a toss?
    I whole heartedly agree with they principles about TCF, charges and transparency on a “going forward from this date” basis but from a past point of view. It is an absolute disgrace that they seem to be able to use retrospection as a weapon.
    It may frustrating for us, it may be annoying to clients but they have what the have and it was done within the law at the time.
    I am so surprised that the industry does not just dig its heels in on this one and say “enough is enough. If you want this to happen then we will see you in court.” It would be a very good cause to fight and they could club together on the legal representation so if they did lose, it would cost each of them a huge sum. If they win it would be a slap in the mouth that Regulator so very badly needs to bring it down to earth on its views about old business.

  10. I hardly think retrospective regulation is the right phrase. The regulations were there but not enforced in spite of all the evidence we had working at the coal face.

  11. The same principle could be applied to closed book mortgages, especially equity release/lifetime mortgages, where lenders change terms after the mortgage for perfectly valid commercial reasons, but fail to update the existing product to reflect the changes which would be fait to the consumer. I have a very good AVIVA LTM example of contract changes to protect the lender (securitised) which doesn’t then reflect the knock on effect of the term changes to the borrower.

  12. Speaking as an ex-regulator, who has worked on both sides of the fence, i think referring to the Regulator as a bunch of parasites, based on the premise that this is retrospective regulation, is somewhat off track. A la Sam’s comment above, these regulations (TCF and the Principles for business) have been in place since 2001. All the regulator has done is interpret the principles in light of the outcomes that consumers have received in these products. I agree that things change over time, and therefore (to quote DH above) what we do this week could be different next week!

    On this basis thats why it was important that firms reviewed these products to ensure that what was fair in 2001, was still fair in 2011, 2014, 2015 etc… Fairness changes, its not a set-in-concrete principle. Firms failed to review the products either a) at all, or b) properly and this is therefore why a lot of these failings (Charges/Comms etc…) have crystallised. This is not retrospective regulation this is a bunch of people at Canary Wharf doing what an industry should have been doing since 2001 – looking at this from a consumers perspective.

    I know many of you on here are quick to put down the FCA, but unless you’ve been on both sides, you cant really comment objectively. Also, the advisory community has not covered itself in glory over the years either, so the inability of some to apply TCF, cannot just be laid at the door of the Life Insurers. Trust me, time at the FCA would open your eyes to some of the things firms get up-to!

    • Hi Darren
      I think its good you have commented from a regulatory point of view, however, can I just pick up on one point and I feel its a major point… you say, on the back of TCF being not reviewed since 2001, “This is not retrospective regulation this is a bunch of people at Canary Wharf doing what an industry should have been doing since 2001 – looking at this from a consumers perspective.”

      My understanding is, most if not all of said policies we contractual at point of sale, are you saying firms must review all policy contracts /wording to comply with (lets face it) a completely un-workable, everchanging, and not fit for purpose rule book ? its a good job its so tall it allows the FCA to hide behind it ! not only that, but think of the cost ! (i know the FCA don,t, or should i say don’t have too !).

      And finally if this is not retrospective, then why the need, and why the blatant miss-use of the S166 ? again a procedure to review historic cases in today’s standards. Guilty till you prove your innocence and pay for it weather you are found to be innocent or not, to be honest you are likely to pay more if you are found innocent !

      Are you left (sitting both sides of the fence) with any wonder why the FCA are held in such low regard, respect for them is at a all time low, IMHO, parasite is quite kind, I can think of a lot better (sorry Marty) to describe the FCA and most of the so called, senior staff !

  13. You can transfer an ISA to another platform or provider and still remain tax free, you can transfer your pension to another platform or provider and remain tax free, yet when you try to transfer a life assurance investment bond you are hit with a chargeable event tax, as well as all the other stuff like MVR’s, exit penalties etc.

    So why not give offshore and onshore bonds the same legislation as ISA’s & Pensions, and allow the investor the right to transfer without incurring a tax penalty? Obviously if they sell any segments of the bond then they cause a chargeable event, but when they are merely transferring to a different provider but the money is remaining within an investment bond then this may encourage more clients to move away from some of those high fee closed book products.

  14. Massive exit penalties, mmm, not just closed book companies.

  15. Well said, Darren Mosstin. Where were the trail-commission-taking advisers in all of this? As an example, pretty much all reviewable whole life contracts by their very nature were mis-sold unless the adviser performed regular reviews to check the client continued to get vfm. How many advisers can say truthfully they have done so.

  16. @Darren Mosstin
    Sitting above both sides of the fence is something called ‘The Rule of Law’. It’s one of the first things taught to legal students. It is the legal principle that law should govern a nation as opposed to the arbitrary decisions of government officials and it’s agents. It means having legal certainty, accountability, equality, and fairness in application of the law. Whilst I would not characterise the regulator as a parasite myself, I do think that it operates beyond the law in certain respects and this is one of them. That can mean undesirable outcomes but that pales into insignificance when you consider what it can lead to when you flout the rule if law.

  17. Surely one way for the regulator to ensure that all terms on existing contracts are obvious to the client (and their adviser) is to tell all firms to follow a standardised annual client report in a standardised way with headings such as “Features of this contract which are of special value to you”, “What other investment funds are available for this money”, “What options are available to access this pension when I retire and what options cannot be offered” or “The penalties you will pay if you move to a new provider explained”.

    Today each company provides the annual information in a different format so clients are not explained the features and benefits of their particular contract in simple language across the piece (and it is not easily comparable for the uninitiated). In addition requests for information by advisers to providers elicits many different responses in the first instance from comprehensive to scant and unhelpful.

    A pretty easy solution in the first instance.

  18. I’m all for helping customers who are stuck with historically expensive contracts and “unfair terms”. Although it does raise the question as to whether “whats good for the goose is good for the gander”, so if it does become the case that contracts written in the 80’s / early 90’s can now be ripped up and replaced with more friendly terms (effectively customers getting out of their contractual obligations that they signed up for originally) does this mean that companies that were guilty of providing overly generous terms in the past (guaranteed annuity rates for example) can also get out of them?

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