LONDON (Reuters) - After winning billions of pounds in compensation from banks for Britons who were mis-sold insurance products on loans, some lawyers are turning their sights on British insurers.
Along with the country’s financial regulator, law firms are looking at whether people who bought a fixed income for life with their retirement savings were properly informed about a product known as an “enhanced” annuity, which pays out more for people who have a shorter life expectancy.
So far the numbers are small, with just 776 general complaints about annuities in 2014-2015 to Britain’s Financial Ombudsman Service which said many people were unhappy at being offered a smaller annuity than expected. This represented a rise of 29 percent, according to the ombudsman’s annual review,
However, based on sales of annuity products around 300,000 people may have reason to claim they have been sold the wrong type in the 2008-2014 period, one industry source estimated.
If there is evidence to support such claims, it could lead to a compensation bill for insurers who sold the products of at least 1 billion pounds ($1.45 billion), in addition to any potential fines and other costs, the source added.
Cancer, heart disease, being a smoker or carrying a few too many pounds could all justify a higher payout, as could living in the heart of Glasgow instead of the bucolic Cotswolds.
Mis-selling of financial products is high on the political and regulatory agenda after the UK’s PPI scandal - the mis-selling of payment protection insurance - which has so far cost banks nearly 30 billion pounds in compensation and resulted in the establishment of an active claims industry.
“It’s been all too easy for the industry to get away with this,” said Tom Dennis, an associate in “no-win, no-fee” law firm Wixted’s professional negligence division.
“We think this is just the tip of the iceberg.”
The biggest providers of long-term insurance, which includes annuities, in Britain in 2014 were Standard Life, Aviva and the now-merged Friends Life, Prudential, Legal & General and Aegon, the Association of British Insurers said.
Reuters has no evidence that any of these companies was a subject of the FCA’s review or of any wrongdoing by them.
All of the companies, apart from Aviva, declined to comment.
Aviva said in Nov. 2014 it would compensate 250 customers who should have been sold enhanced annuities, following a routine review of customer policies.
“We believe the market must provide full transparency and use standardised underwriting methods to make it easy for customers to compare annuity rates and consider the most suitable options,” an Aviva spokesman told Reuters.
The Financial Conduct Authority (FCA) said a year ago it was concerned retirees were not given enough information by insurers to easily access an enhanced annuity.
It has since carried out a fact-finding exercise, but has yet to provide any details and, according to industry sources, has warned insurers not to discuss the issue publicly.
The FCA, which could impose fines, force insurers to pay compensation or decide to commission a broader review of the sector, declined to comment on its findings.
“If the FCA and the Treasury want to go very hard on this industry, it could be like PPI,” Adrian Boulding, policy director at the Tax Incentivised Savings Association, said.
The previous FCA review of eight unnamed pension providers who together made up about 70 percent of the UK annuity market raised initial concerns about how annuities were sold and the regulator has since found evidence of failures in insurers’ systems, two insurance advisory sources said.
It has collected documentation and records of telephone sales between 2008 and 2014, to see if individuals were told they could be eligible for an enhanced annuity, sources said.
Britain’s consumer body “Which?” said around 20 percent of all annuities sold were enhanced, while 60 percent could qualify for some level of enhancement.
The FCA has also checked whether customers were told they might get a better rate on the open market than with the insurer with whom they were saving for retirement, they added.
Pensions reforms last year have halved the sale of annuities, as over-55s are no longer required to use their pension pots to buy them. Industry specialists now expect enhanced annuities to make up a larger proportion of sales.
The FCA has previously said customers could have gained up to 175 pounds a year on average by buying an enhanced, rather than a standard annuity.
While industry representatives were unwilling to discuss the matter publicly, insurers could argue markets were less sophisticated in 2008 and fewer enhanced annuities were available.
“We should not really be judging it by today’s standards but inevitably we are in 2016, there is always an element of looking at it with 2016 eyes,” said Noleen John, insurance consultant at law firm Norton Rose.
If the FCA did force them to pay out, insurers would have to use reserves for compensation and the cost of managing claims.
“Insurers expect at some stage to face some kinds of mis-selling claims,” said Jennie Kreser, pensions partner at law firm Silverman Sherliker.
($1 = 0.6912 pound)
Editing by Alexander Smith