In addition to the risk of high commission being charged, non-advised services could carry the risk of bias, with third parties only prepared to offer those annuities that offered the highest commission levels.
Concerns have been expressed that the commission payment could be so high that, in some circumstances, it would be more than the cost of advice. That is to say, it would be less expensive to take advice with the benefit of receiving a personal recommendation (and of redress should the advice prove to have been unsuitable), than to transact on a non-advised basis.
However the regulator said that distribution would therefore need to be paid for in another way, meaning that consumers would be charged an arrangement fee for non-advised sales. This, it said, could have a "significant impact" on competition.
It said that other options, such as drawdown, would still carry commission. Therefore limiting any ban to annuities could distort competition between these potentially substitutable products. Firms might as a consequence be incentivised to promote drawdown over annuities with potential harmful impacts on consumers in the long term.
The FCA added:
"This would mean that, to avoid distorting competition, we would need to consider banning commission on a wider range of investment solutions. In addition, banning commission might not result in better-value annuities, particularly if providers replaced the commission spend with alternative marketing/distribution spend.
“We recognise that there may be benefits in exploring these outcomes in more detail and will assess the potential need for additional data collection to analyse these issues following the review of responses to this paper.”
Data from the ABI shows that around 189,000 annuity contracts were written in 2014. Of these, 132,000 were sold without advice. Furthermore, there has been a substantial drop in the number of annuities bought since the announcement of the pension freedoms in March 2014. In Q1 2014, there were 74,000 new contracts; in Q1 2015, that number had fallen to 21,000, a drop of over 70%. In the same period, non-advised annuity purchases had fallen by just under 70%. Non-advised annuities provided by third party distributors fell by two-thirds, to £157m, estimated at somewhere between 3,000 and 5,000 contracts compared with an estimated 16,000 contracts a year earlier.
Christopher Woolard, director of strategy and competition at the FCA, said:
“Pensions are of fundamental importance and it is vital that the market works well for consumers. Our proposals today are designed to ensure that consumers have access to products and services that are well governed and deliver value for money following the government’s pension reforms.
“We will continue to monitor the market as it evolves following the introduction of the government’s pension reforms to ensure that firms are helping consumers get the best outcome in retirement.”
