Prudential has been fined almost £24 million by the Financial Conduct Authority (FCA) for failing to properly advise clients who were sold a retirement income product (an annuity). What went wrong and what does it mean if you are a Prudential customer?
Prudential fined millions for annuity sales
The FCA has fined Prudential £23,875,000 because it failed to put the correct controls in place to make sure its pension customers were told about the right to shop around. Under the rules that have been around for – well, years – people who pay into a pension through their pension provider have the right to shop around if they want to use their pension fund to buy a regular income in retirement with an annuity.
SAVVY TIP: Since April 2015, you’ve been able to take money straight from your pension pot. But before those rules were introduced, most people had to buy an annuity.
What went wrong?
Between July 2008 and September 2017, Prudential’s non advised annuity business focused on selling annuities directly to their existing pension holders. Firms are supposed to explain to customers that they may get a better rate if they shop around, however Prudential didn’t have enough controls in place to make sure this happened when people rang its call centre. The information did appear on so-called ‘retirement packs’ that Prudential sent out to its customers as they reached retirement age.
However, there were a couple of problems with call centre information:
- Prudential failed to ensure that documentation used by call handlers was appropriate and failed to monitor calls with customers properly.
- Before 2013, Prudential call handlers and their managers were incentivised with financial bonuses and competition prizes, such as spa breaks. These bonuses and prizes were based on sales targets. The average bonus a call centre agent could expect was 37% of salary. So, Prudential staff could have put their own financial interests ahead of their customers.
SAVVYWOMAN’S VIEW: It’s not good enough that companies like Prudential get it this wrong. The rules around the ‘open market option’ (namely, that pension companies have to tell consumers they have the right to shop around) are not new. But between 2008 and 2015, Prudential didn’t have the right controls in place to make sure this happened when people rang its call centre. Not only that, but Prudential knew that the percentage of its customers who didn’t know they had the right to shop around, or who bought an annuity without shopping around, was higher than the market average. Prudential depended on people buying their annuity from the company, rather than switching, for a significant percentage of its profits.
Shopping around for an annuities
If you decide to buy a retirement income product called an annuity, the decision about who you buy it from can affect your income for the rest of your life. That’s why it’s so important that customers are told that they have the right to shop around and that they may get a better rate from a rival firm. It’s especially so for non-advised sales, where you would select an annuity based on factual information and you wouldn’t receive financial advice.
An annuity is basically an insurance policy that pays out for as long as you live. There are different types of annuities, but most of them guarantee to pay out a regular income. You can receive the income at different time intervals (i.e. monthly, yearly etc.). When you buy an annuity, you hand over your pension pot in return for this regular income. It is generally a ‘once in a lifetime’ decision. You can’t change your mind a few months later or ‘switch’ your annuity as you can your mortgage or car insurance. However, you can shop around – in the same way as you would for a mortgage or car insurance – before you buy it.
What is Prudential’s response?
Prudential has agreed to the FCA’s findings. The firm has voluntarily agreed to conduct a past business review of non-advised annuity sales to find the customers who may be entitled to redress. As of 19th September 2019, Prudential has offered approximately £110 million in redress to 17,240 customers – although the final bill will be significantly higher than this. If you’re a customer of Prudential who had a pension with them, and then took out an annuity with them, you don’t need to do anything. Prudential says it’s already been in touch with most of those customers who’ve been affected and it hopes to send out letters with offers of compensation to all customers by the end of October.
SAVVY TIP: If you’re in this position and you’ve recently moved, make sure Prudential has up to date contact details for you.
Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said:
“Prudential failed to treat some of its customers, who could have secured a better deal on the open market, fairly. These are very serious breaches that caused harm to those customers. Prudential is now rightly focussed on redress and today’s financial penalty reinforces the cardinal obligation of fairness that firms owe to customers.”
In a statement, Prudential said:
“We are deeply sorry for the historic failings in our non-advised annuity business and any detriment this has caused our customers. We are working hard to put this right and are on schedule to offer redress to the vast majority of affected customers by the end of October this year. Our systems and controls have been significantly strengthened in the past two years through a substantial investment in our business.”
If you want to read the whole (73 page!) notice, you can download it from the FCA website.
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