Further memorandum submitted by the Financial
TREATING CUSTOMERS FAIRLY AND GROUP PENSIONS
1. When the FSA gave evidence to the Committee
on 13 November, we undertook to provide an update on the concept
of treating customers fairly (which replaces policy holders' reasonable
expectations). We also said we would provide further information
about the extent to which the sale of new Guaranteed Annuity Rate
(GAR) policies taken out as part of group pension schemes between
1988 and 1993 were subject to conduct of business rules.
2. As Howard Davies said in evidence on
13 November, to support the FSA's new approach to regulation we
have set out a number of high level Principles for Business which
all regulated firms must follow. One of these states that a firm
must pay due regard to the interests of its customers and treat
them fairly. Others require:
that firms pay due regard to the
information needs of their clients and to communicate information
to them in a way which is clear, fair, and not misleading;
that they must manage conflicts of
interests fairly; and
that they must take reasonable care
to organise and control their affairs responsibly.
3. These Principles replace various requirements
of the previous regulators, including that of "policyholder'
reasonable expectations" and provide us with a basis for
articulating in more detail how we expect firms to treat their
customers at various stages in the relationship.
4. In preparation for N2, we carried out
a review entitled "Treating customers fairly after the point
of sale". This focused on "after the point of sale"
because the Financial Services Act regime for retail consumers
had focused principally on the marketing and selling of investment
products. By contrast, the consumer protection objective under
FSMA does not distinguish between "before" and "after"
the point of sale. In line with the Principles referred to above,
our review therefore covered the whole life of a firm's relationship
with its customers.
5. We published a discussion paper in June
2001 on the outcome of the review; a copy is attached. Our conclusions
were that unfairness to retail customers occurred in five particular
some products and information are
difficult for consumers to understand;
customers are not always kept appropriately
informed after the point of sale;
products and firms do not always
deliver what consumers are led to expect;
customers are discouraged from "switching"
suppliers or products;
customer complaints are not always
dealt with fairly.
6. On the issue of consumers' expectations,
we pointed out in our paper that financial promotion and the sales
process can create expectations among consumers which are unlikely
to be met, often with unpleasant surprises further down the track.
The FSA has several projects already under way which will address
this issue, including:
development of a new disclosure regime
at the point of sale which will aim to reduce the opportunity
for "unpleasant surprises" to arise later;
investigation by a task force of
the use of past performance material in advertising and elsewhere;
the new rules on financial promotion;
the Comparative Tables of financial
products, the first three of which have now been launched;
other FSA consumer information and
education materials designed to help consumers understand what
they should expect of different products and situations, and to
encourage them to plan and review their finances and to encourage
them to shop around for the product or service that best meets
their needs; and to understand their rights including their right
our use of the Unfair Contract Terms
Regulations (under which the FSA now has powers).
7. We received 30 responses to the "Treating
Customers Fairly" discussion paper. Most expressed strong
support for the general principles outlined in the paper and in
particular for our conceptual approach in defining fairness (other
than a rigid "check-list" based criterion). Where concerns
were raised, they related principally to specific issues of detail
in interpretation or possible implementation, including, for example,
practical issues arising from the proposal to publish comparative
data on complaints made against firms.
8. We shall publish a full response statement
early in the New Year, and in due course provide progress reports
on the work programmes designed to rectify the unfairness in the
areas identified in the discussion paper.
9. As part of the review of with-profits
products we shall also shortly publish a paper on discretion and
fairness in with-profits contracts. This will bear directly on
some of the expectations issues which particularly affect policyholders
and will outline how we approach the Principles for Business and
the Unfair Contract Terms Regulations in this context.
10. Later this year we will publish a further
Discussion Paper on the subject of governance of with profits
funds. A key issue which this paper will consider, which is relevant
to treating customers fairly, is the current lack of accountability
to policyholders on how the discretion afforded to companies'
management over the operation of with-profits funds has been and
will be exercised.
11. We will keep the Committee informed
of progress on all of the above.
12. In his evidence before the Committee
on 13 November, Howard Davies explained that the conduct of business
rules which the FSA inherited were focused on the rules at the
point of sale. He noted, however, that guaranteed annuity policyholders
did not have the benefit of the protection of the 1986 Financial
Services Act at the point of sale, as these policies were all
sold before this legislation came into force (in 1988). He further
indicated that he did not think that new members who joined a
group scheme between 1988-93 were covered by the PIA
rules, but undertook to write to the Committee to clarify this
13. We can confirm that this is broadly
the position. The precise details are set out below.
14. "Group schemes" are rights
given under-occupational pension schemes-underwritten by policies
which could have been issued to the Trustees of the occupational
pension schemes in one of two ways:
through a master policy with provision
for additional members (or increments) to be introduced to the
schemes subsequently; or
through a series of individual policies
issued to the trustees as and when new members joined the scheme.
or, possibly, a combination of the two.
15. We are advised that the Equitable did
not issue new master policies for the establishment of group schemes
which conferred GAR rights on individual members after June 1988.
Nor, where individual policies were issued as part of a group
scheme (as described in the second bullet of paragraph 14), did
any policy issued after 1988 carry GAR rights. But, of course,
it would have been possible for group schemes with master policies
issued before this date to continue to add new members who would
have had the benefit of the GAR. From July 1988, the facility
to add new members with GAR rights was progressively removed by
16. Group scheme members with GAR rights
have throughout the period from 1988 to the present continued
to pay additional premiums which have attracted GAR rights. (The
payment of those premiums by scheme members has not, however,
involved the sale of new policies.)
17. The main provisions of the Financial
Services Act 1986 came into force on 29 April 1988. Prior to this
date, no conduct of business regulation existed in this area.
18. After 29 April 1988, LAUTRO
was responsible for regulating the sale and marketing of policies.
Its rules were therefore directed at the marketing practices of
insurance companies, not at the administration of policies and
how companies dealt with claims. Accordingly, LAUTRO was not responsible
for regulating the manner in which the Equitable met claims on
19. LAUTRO's rules governing the provision
of information at the point of sale ("disclosure rules")
came into force on 1 July 1988. These rules applied to the Equitable
in respect of the sale of new policies after that date.
20. The LAUTRO disclosure rules applied:
where the initial sale of a master
policy to the occupational pension trustees occurred after 1 July
1988 (but, as noted in paragraph 15 above, these would not have
been policies to which GAR rights attached); or
where the occupational pension trustees
took out individual policies after 1 July 1988 for the purpose
of admitting additional members into the scheme.
21. In these circumstances, there was a
requirement on the Equitable to provide "product particulars"
to the trustees in accordance with LAUTRO Rule 5.12. (The relevant
provisions are LAUTRO rule 5.12 (1)-(4), which are attached to
22. The obligation to provide the trustees
with scheme information only applied at the point of the initial
sale of a master policy (or individual policies) to the trustees.
The requirement (in 5.12(4) of the rules) to update that information
applied only where changes occurred to information previously
given in accordance with the rules (ie in respect of master policies
or individual policies sold after 1988). It did not apply to policies
sold before 1988.
23. The LAUTRO product disclosure rules
for occupational pensions apply at two levels:
disclosure to the trustees when they
first buy a master policy or at any time when they buy an individual
disclosure of information to the
trustees for transmission to employees joining the occupational
24. The former is covered by 5.12(1)(a)
and provides for product disclosure on an example basis to the
trustees. Employee disclosure is covered by 5.12(3) and provides
for product information to be given to the trustees for every
joinerthose joining at the outset and those joining in
PIA OMBUDSMAN ARRANGEMENTS
25. When the PIA was set up in 1994, the
PIA Ombudsman was given a voluntary jurisdiction, as well as a
mandatory jurisdiction, in order to enable him to deal with complaints
about former FIMBRA
and LAUTRO firms and to effect a clean split between his responsibilities
and those of the Insurance Ombudsman.
26. Where a PIA member submits to the voluntary
jurisdiction of the PIA Ombudsman, the Ombudsman is also able
to deal with complaints:
in respect of business which occurred
before the firm became a member of PIA or before the Financial
Services Act 1986 came into force;
in respect of the administration
of life policies and pensions and other long-term insurance contracts
(as distinct from the marketing and selling of those products);
in respect of certain unregulated
business (term insurance; permanent health insurance; and long-term
27. Most life companies chose to submit
to the PIA Ombudsman's voluntary jurisdiction. The Equitable did
so from 1 April 1995.
18 December 2001
4 Personal Investment Authority (a Self-Regulating
Organisation under the Financial Services Act 1986). Back
Life Assurance and Unit Trust Regulatory Association (a Self-Regulating
Organisation under the Financial Services Act 1986). Back
(Insurance companies were authorised under the Insurance Companies
Act 1982 and automatically authorised under the Financial Services
Act 1986.) Back
Financial Intermediaries, Managers and Brokers Regulatory Association
(a Self-Regulating Organisation under the Financial Services Act