The financial watchdog is concerned customers with old policies are being ripped off.
The Financial Conduct Authority (FCA) is planning an investigation this summer into 30 million ‘zombie’ insurance policies worth billions of pounds.
The review will look at pensions, endowments, investment bonds and life insurance policies set up by UK insurers from the 1970s up to 2000, which combined are worth an estimated £150 billion.
The FCA is concerned long-term customers with closed products aren’t being treated fairly and wants to investigate the fees and level of service they receive.
Details of the inquiry will be unveiled in the FCA’s annual business plan on Monday.
The investigation
The FCA said the large number of old accounts in this sector warranted further exploration and was part of the regulator’s new proactive approach to regulating the financial sector.
The investigation will look at how those with old products are being treated, including how easily they can move their money, the quality of communication from providers, how firms are looking after accounts and what exactly firms do with them.
One concern is that high exit fees are stopping policyholders from moving to a better provider. A large number of pension policies set up before 2001 are thought to have large exit fees, which can diminish a policy’s value if moved – effectively locking customers into poor deals.
[SPOTLIGHT]Another concern is that insurers are using returns from ‘zombie’ funds, which are shut to new customers and neglected by existing ones, to pay for other parts of their business.
Clive Adamson, the director of supervision at the FCA, told the Daily Telegraph, which broke the story: “We want to find out how closed-book products are being serviced by insurance companies, as we are concerned insurers are allocating an unfair amount of overheads to historic funds.
“As firms cut prices and create new products, there is a danger that customers with older contracts are forgotten. We want to ensure they get a fair deal. As part of the review we will collect information to establish whether we need to intervene on exit charges.”
The review will exclude workplace pension plans offered by employers and although many of the policies set up in the 1970s, 80 and 90s were sold by doorstep salesmen who were driven by large commissions, the FCA won’t investigate selling practices.
The investigation is expected to last between six to 12 months.
Industry reaction
The Association of British Insurers (ABI) responded to the news of the probe in a statement which emphasised that its members took treating customers fairly ‘very seriously'.
Hugh Savill, the director of regulation at the ABI, said: “Company boards will regularly review all aspects of product design, customer servicing and product performance. This is as relevant to older product lines as it is to new ones."
He added: "We will of course work closely with the FCA as they undertake this review."
Another blow for insurers
Share prices in UK insurers that could be linked to the investigation plummeted today as the news broke.
By mid-afternoon on Friday, Aviva was down 6.67% and Legal & General 7.53%.
This comes as a second big blow to insurers this month following the Chancellor’s Budget, which outlined a dramatic shake-up of pension rules including the freedom to choose to not buy an annuity.
Do you have old policies that are costing you a small fortune? Have you tried to move your money but encountered high exit fees? Let us know your experiences in the Comments box below.