Prudential is the second pension provider to be hit by a fine from the FCA this year — after Standard Life Assurance fell foul of the regulator in July
The Financial Conduct Authority (FCA) has handed a £23,875,000 ($29.4m) fine to Prudential for stifling pension customers’ income potential by selling annuities in full knowledge they could get a higher-rate return elsewhere.
The UK regulator found the insurer and pensions provider had failed to ensure that customers were “consistently informed” they may be able to find a better deal by shopping around — something the FCA put down to Prudential’s sales incentive scheme.
Prudential isn’t the only company to fall foul of the regulator’s rules on the fair treatment of customers, with Standard Life Assurance receiving a £30,792,500 ($37.9m) fine in July this year for similar failures.
The FCA’s executive director of enforcement and market oversight Mark Steward, 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.”
An annuity is a retirement income product that can be bought with a customer’s pension pot, and which pays a regular income in return. A customer requires accurate information when choosing because it is a complex financial product and can affect a customer and their dependants for life.
Customers with negative health and lifestyle factors, which could shorten life expectancy, may be eligible for an enhanced annuity — a product delivering a higher rate of payment on the expectation the they won’t live as long as healthier people.
Why was Prudential fined?
Between July 2008 and September 2017, Prudential sold non-advised annuities — a type of product bought without financial advice — directly to existing Prudential pension holders.
Regulation in the UK necessitates that pension firms explain to customers that they may get a better annuity rate if they shop around on the open market, and in its judgement, the FCA decided Prudential knew many customers could get a higher income in retirement by shopping around.
Based on its findings related to annuities sold prior to 2013, the FCA ruled the risks created by a lack of appropriate systems and controls were increased by sales-linked incentives for call handlers and managers.
It judged that staff members might put their own financial interests ahead of ensuring fair customer outcomes.
According to the regulator, call handlers were incentivised by the possibility of earning an additional 37% on top of their base salary and winning prizes such as spa breaks or weekend holidays.
The regulator also found Prudential failed to ensure that documentation used by call handlers was appropriate, and that it failed to monitor calls with customers to ensure they were correctly informed.
How did Prudential respond to the fine?
The FCA’s fine was originally set at £34,107,200 ($42m), but as per its policy on disciplinary action, Prudential qualified for a 30% discount for accepting the regulator’s findings and taking action to compensate the affected parties.
According to the regulator, Prudential voluntarily agreed to conduct a past business review of non-advised annuity sales in order to identify any customers who may be entitled to redress.
As of 19 September 2019, Prudential has offered approximately £110 million ($135.3m) in redress to 17,240 customers, including compensating those entitled to a higher-return product up to the same amount they’d get elsewhere on the market.
The insurer and pensions provider claimed to have already contacted the vast majority of potentially affected customers as part of its continuing past business review.