Zombie abuse: the past returns to haunt insurers in FCA inquiry

Insurance companies are under investigation for poor communication and heavy fees on 'closed book' customers

Many insurance firms did not consider if their policies were still suitable according to the FCA (Getty)

Many Britons read letters from their insurance companies with a furrowed brow. Most of the time they’re cluttered with baffling jargon making it hard to tell if you’ve lost money, made money, or simply lost your grasp of the English language

But now the boot is on the other foot. Six life insurance companies, including FTSE 100 giants the Prudential and Old Mutual, could face unlimited fines after the City regulator found evidence they had mistreated long-standing customers by poorly communicating with them about fees and charges.

Millions of workers flocked to insurance giants during the 1980s and 1990s to take out policies like “self-invested personal pensions”, savings products, life insurance plans, endowments and investment bonds. The typical size today would be between £15,000 and £25,000.

Around 30m of these dusty old policies – collected together in so-called “zombie” funds, now sit in the virtual vaults of insurance companies. But the people who own them are neglected at the expense of newer insurance shoppers, the watchdog said.

Acting Financial Conduct Authority (FCA) chief executive Tracey McDermott declared: “The practices at some firms appear to have been poor.”

A pot worth £4,350 and frozen in 2014 is now worth just £1,500

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Out of 11 insurers it probed, the FCA has opened a formal investigation into six of them: Prudential, Old Mutual, Police Mutual, Abbey Life, Scottish Widows and Countrywide Assured.

Such “enforcement actions”, as they are known can lead to major fines, with two-thirds of enforcement actions by the authority resulting in financial penalties last year.

Despite the decisive action, the FCA’s decision-making in the run up to the announcement has been a chaotic. Some say it has undermined the credibility of the organisation. The probe originally resulted in a botched media briefing by a senior executive at the FCA in 2014 which triggered a slump in insurance shares and recriminations for the watchdog.

Clive Adamson, the FCA’s former director of supervision, was quoted in a newspaper report which implied the regulator would ban exit fees on old policies. Instead it was only examining the fees.

Shares in a host of insurers slumped the next morning and it took the regulator six hours to clarify the scope of the probe, triggering anger from company bosses and trade bodies.

That led to a high-level investigation and parliamentary enquiry which criticised the regulator’s practice of pre-briefing new initiatives to journalists before they were released to the wider public.

The controversy precipitated the exit of senior managers and has been blamed as a factor in the firing of former boss Martin Wheatley by the Chancellor. Adamson also quit the insurer after the debacle.

The new phase of the investigation will be welcome relief for the FCA but not the insurers under scrutiny. The watchdog has homed in on how firms communicated with their customers and what charges they would face if they sought to surrender or transfer their policies.

They found many firms did not consider if their policies were still suitable now for the customers, and whether they gave them enough information to make informed decisions. It also found customers wanting their money back to spend or transfer to different policies would often be hit with high exit fees and were either not told about the charge or given it buried in the small print.

Savers wanting to freeze their policy and stop paying in contributions would also be hit by an on-going charge despite not paying in any more, slashing away at the size of the pot over time.

In one example, a pot of contributions worth £4,350 had been made by 1992 when the saver decided to “freeze” the account, meaning they would stop paying in to it. The annual management fee on the pot automatically rose to 7.25 per cent from 1.25 per cent. When the policy was valued in 2014 it was worth £3,300 and on top of that an exit charge then slashed it to just £1,500.

The watchdog criticised the insurer for applying the terms and conditions too strictly and not focusing on the outcome for the saver. It also found insurers made little attempt to track down policy-holders who had moved address.

In a damning verdict on the bosses of the groups, the FCA said that boards and senior managers “do not have a grasp of closed-book customers and outcomes…They rely on management information that is not giving them a rounded and comprehensive picture.”

The findings alarmed senior MPs. Chairman of the Treasury Committee Andrew Tyrie said: “The FCA now need to examine carefully whether customers have suffered detriment. The Treasury Committee will be keeping a close eye on this.”

Pinsent Masons insurance partner Bruno Geiringer said the findings raised “serious concerns” for life insurers and could spark a possible flurry of deal making by life insurers.

“I would expect [insurers] now to be looking very eagerly at the possibility of picking up some of the closed book [products] at much lower prices,” he said. “This might stimulate senior management of some insurers to lance the boil and let stagnant closed books go on to the market for sale, leading to an expected increase in deals.”

Prudential, Scottish Widows, Old Mutual and Police Mutual said they would “work closely” with the FCA on the enforcement action while Chesnara, which owns Countrywide, also said it would “fully co-operate”. Deutsche Bank, which owns Abbey Life, declined to comment.

The findings of the enforcement will not be known for some months – just enough time to decipher an insurance policy statement.