A consumer protection organization in the U.K. has recommended sweeping reforms for that country’s annuity purchasing system. In essence, the Financial Services Consumer Panel (FSCP) is advocating for better transparency and oversight over services that provide annuity purchase advice.
The panel is an independent statutory body set up to advise the U.K.’s Financial Conduct Authority (FCA) on issues related to consumer protection. Similarly, the FCA has undertaken a study of whether consumers are getting a fair deal when they purchase an annuity.
In the U.K., citizens can purchase an annuity from their “host” pension provider or shop the “open market option” (OMO). However, in its report, the panel found that while retirees are increasingly purchasing annuities through the OMO, they are doing so without getting advice and instead buying through “non-advice” Internet websites that may provide less consumer safeguards.
Moreover, those consumers who do shop the open market found the process confusing, and the panel stated that websites were hazy regarding charges, didn’t fully explain the difference between the protection offered through the advice and non-advice options, and that searches for quotes covered the entire or only part of the market.
The FSCP noted that non-advice services are more profitable because of lower delivery costs, yet they often charge more. The non-advice marketplace is further complicated by the entry of annuity providers as distributors. These providers, the panel detailed, are either establishing their own brokerage or buying an existing service to secure distribution. Therefore, if they do not retain a customer as a “rollover” annuitant, they can still benefit from commission in the non-advice network.
Therefore, the panel recommends the FCA institute several reforms that include tighter regulation of the non-advice marketplace that ensures more transparent disclosure of charges, higher professional standards and a clear explanation of the implications for consumers if they go into the non-advice channel.
Lastly, and perhaps most important, the panel urges the FCA to undertake a “rigorous” market study to examine possible exploitative pricing of “rollover” annuities sold by insurance companies to their defined contribution customers who have saved with them for a pension and the impact of opaque charges and regulatory arbitrage that may hamper informed consumer choices between rollover and OMO providers as well as non-advice and professional advice distribution models. Once complete, the government must institute structural reforms that promote effective competition in the marketplace.