There’s a theme running through the FCA’s Consultation Paper 16/12: Secondary Annuity Market proposed rules and guidance. If you’ve braved all 112 pages (or any of them really) you might have spotted it. Here are some clues!
Paragraph 1.7, We believe that there is a significant risk of poor outcomes for consumers in the secondary annuity market.
Paragraph 1.10, The Government’s consultation response acknowledges that for most people retaining their annuity will be the best choice as it provides a regular guaranteed, income for life.
Paragraph 1.11, We recognise that a secondary market in annuities may deliver flexibility for some consumers. However, we believe consumers selling their annuity income could be exposed to significant risks.
Positive, eh? And then we get into the detail of those risks:
- Longevity risk, – increased risk of running out of money in retirement.
- Value for money, – consumers may struggle to make an informed decision.
- Consumer inertia, – the old not shopping around chestnut.
- Vulnerability, – reduced mental capacity, pressure to settle debts, impact on benefits.
- Potential conflicts of interest, – harking back to the bad old days but at least we can rule out commission as an issue.
- Potential risk of frauds and scams, – natch.
- Market depth, – a lack of players means a lack of price competition.
Now, it is only correct to acknowledge that protections are being put in place. To detail them would be another blog but they are all on the theme of disclosure: charges information, net values, access to guidance, the importance of both shopping around and taking advice and so forth. Which is all good but requires a degree of engagement and understanding. It may not help the vulnerable who are in the most danger of finding themselves without a source of income. There will be no additional measures to protect the vulnerable beyond a reminder of existing obligations. And it is they who are likely to make up much of the clientele. Which is a deeply uncomfortable thought.
This takes me back to when the prospect of a secondary annuity market was confirmed and the question of whether it would effectively be DOA. The feeling of the whole thing being done through gritted teeth and with caveats emitting from every pore persists. It doesn’t exactly scream enthusiasm from anyone bar a few determined politicians, some ever-resourceful scam artists and the inevitable band of claim firms who will join us once the cries of mis-selling start, if not before.
Yes, it’s good to give people who are genuinely trapped in an annuity and who, by some twist of sums would be better off out of it, the option. But how many people really fall into that category? And how many who do not and are vulnerable might find themselves making another poor decision? Specifically those who are in debt or are desperate for money, are under pressure or just not capable of making an informed decision. They deserve our care and protection, not to be turned upside down and shaken by the ankles.
The risks are not limited to annuity holders and it begs the question of how many firms will expose themselves to that extent for what may be limited gains. Which, in turn, drives one of the risks noted by the FCA if the market does not have enough players, prices offered to annuity holders will likely be even lower.
So, a terrible idea that no-one really wants and where very few people will benefit while many more are likely to suffer. And I’m pretty *****y angry about the whole thing. But it’s happening. And the best we can hope for is that the gimlet eye of the regulator will be firmly trained on all parties.