A review of life insurers from the U.K.’s Financial Conduct Authority (FCA) published on Thursday found that firms haven’t treated clients fairly in poorly performing historical investment products.
The FCA’s review focused on how firms are operating their so-called “closed book” investment-based products — life insurance products that are closed to new business, which were set up and priced at least 15 years ago — to determine if they were treating long-standing life insurance customers fairly.
The review stemmed from the regulator’s concern that firms were benefiting from customer inertia by keeping clients in high-charging, poorly performing products, or by cutting costs in a way that was detrimental to customers. The review did not assess how individual policies were originally sold and instead focused on how customers are being treated now.
The FCA’s review found a mixed picture, with firms demonstrating good practices in certain areas and poor practices in other areas. In particular, it found problems with the disclosure of the charges clients are incurring and even in cases in which clients are aware of the changes; specifically, the report notes that the impact of these charges can be significant and prevent customers from shopping around.
It’s too early to determine whether customers have suffered detriment as a result of these practices or how widespread these practices were, the FCA’s report finds. As a result, the FCA is planning more work in this area, including measures to deal with both past behaviour and to improve future behaviour.
To deal with past practices uncovered if the review, the regulator’s that its enforcement division is launching investigations to determine whether certain firms have failed to meet regulatory standards; and, if so, whether remedial and/or disciplinary action is necessary. Depending on what these investigations find, the FCA may expand this scrutiny to the rest of the industry.
“The practices at some firms appear to have been poor. We have particular concerns regarding how some firms communicated with their customers about exit … charges,” says Tracey McDermott, acting chief executive of the FCA, in a statement. “We are now doing 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.”
To improve future clients’ treatment, the FCA says it will develop additional guidance for firms and launch a discussion to reach a voluntary solution with the insurance industry to cap or eliminate exit charges on these investments.