Insurers took a hit as the City regulator fixed its sight on the sector, wiping more than £3 billion off the value of Britain's biggest insurance names.
Shares in Resolution (down 11.5 per cent to 282.4p), Aviva (off 5.7 per cent to 456p) and Legal & General (down 5.5 per cent to 200.7p) fell heavily after it emerged that the Financial Conduct Authority is planning to investigate the sale of 30 million policies sold between the 1970s and the turn of the century to see whether customers have been exploited.
Standard Life was also hit, sliding 3.1 per cent to 374.4p, while Prudential fell 5.1 per cent to 1246p.
The review will start this summer and focus on products including pensions, endowments and life insurance policies sold by door-to-door salesmen. Experts believe the sector is worth about £150 billion, meaning any fines, compensation or rule changes could be damaging.
The watchdog is particularly concerned that insurers have been exploiting long-standing policyholders and not giving them the same levels of service as newer customers. The FCA also fears that “zombie” funds, which are closed to new clients, are being used by insurers to pay bills from other parts of their businesses.
Clive Adamson, the FCA’s director of supervision, said: “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.”
The news is another big setback for an industry still trying to come to terms with the radical reforms outlined in last week’s Budget, in which George Osborne revealed that savers will no longer be forced to buy an annuity, or income for life, when they retire.
That news shaved £4.5 billion off the value of the industry in just one afternoon. Analysts at Barclays believe the UK individual annuity market could shrink in value from £12 billion to £4 billion a year within 18 months.
David Smith, wealth management director at Bestinvest, said: “It’s quite incredible just how much good news has hit the pensions industry over the last ten days.
Today’s news could be just as momentous, as it may free the millions trapped in underperforming high charge funds and drive a stake through the heart of Zombie funds once and for all.”