FCA Insurance Sector Review: Don’t panic!

April 22, 2014

You may have heard lots in the news over recent weeks about the Financial Conduct Authority (FCA) and their plans to review insurance policies. The media became a bit sidetracked about the slightly bungled way that news of the review came to light. So because we’re decent folk who are here to help, here’s a summary of what the review actually means, delivered in clear, plain English.

What is the FCA reviewing?

The FCA (the people who regulate the financial services industry in the UK) is going to review Britain’s life insurance industry, focusing on some 30million policies issued from the 1970s to 2000. They’re particularly interested in something called “zombie funds” and whether customers are getting a fair deal. The investigation will look into pensions, endowments, investment bonds and life insurance policies, particularly those that penalise savers who want to switch providers by charging high exit charges. It will look into the service customers receive in relation to those accounts. This is good news.

What’s a zombie fund?

You’d be forgiven for thinking this is a special fund for the undead. But a zombie fund is actually a fund now closed to new clients. There’s a concern that old policies which have stagnated are not being given the same priority by insurance companies as their newer policies.

Many older policies include terms that penalise those attempting to switch to cheaper providers. And when we use the term ‘penalise’, it’s big. Some savers face losing up to half their savings if they move to another company.

That’s not to say that all old policies are automatically bad. The concern is that older customers are being forgotten. Consolidation and outsourcing within the industry means there’s a good chance that older funds are not being managed by the same people who they were initially taken out with which is adding to the confusion.

What impact did this announcement have?

This all came rather out of the blue, with news of an impending announcement coming before the actual detail was issued. Investors panicked a bit. Around £2.4billion was knocked off the market value of the biggest insurers. However, there was some recovery when the FCA’s actual business plan was published, revealing that the review is likely to be less disruptive to investors than first feared.

Basically, the FCA isn’t planning to review every individual policy. They’re also not intending to review any exit fees, providing the policy was complaint with the rules that were in place at the time it was issued. So, as long as the insurance companies and their policies were OK at the time, they’re not in line to be issuing huge payouts, thus avoiding mis-sold PPI-type costs.

What does this mean for my policy?

If you have a pension or investment policy taken out between 1970 and 2000 in funds that are now closed, you may be affected. We’re talking about personal funds rather than workplace pension schemes. However, it seems unlikely that a big payout will be on the cards. The FCA is not looking at applying current standards retrospectively so you’re unlikely to get back years of fees. But if the review does discover that consumers have lost out due to certain practices, they may be forced to reimburse you.

What happens next?

The actual enquiry will start this summer. It’s going to take a while.
It’s difficult to predict the outcome at this stage. The review should be a good thing for customers since it’s making sure that you’re getting a fair deal, and potentially forcing insurers to review their policies more regularly and issue clearer communication to policyholders.

In the meantime, dig out your paperwork from any old policies you do have. Find out who’s actually looking after your money now. It’s a good idea to review them, but the best course of action may not be clear until we see what insurance providers do as a result of the inquiry. Older policies might be performing badly, so your first instinct may be to try and move funds. But it’s complex – exit fees might make this a bad choice. Seek some advice to see what you can do now, but otherwise sit tight for the results of the inquiry.