Our new briefing outlines CP16/12 about the secondary annuities market and some of the questions it raises.
The FCA published its consultation CP16/12 on 27 April 2016 setting out proposed rules and guidance on the secondary annuities market.
The consultation follows on from DWP and Treasury consultation in 2015 about the creation of a secondary annuities market from April 2017. The new market will allow a pension annuitant to enter into the following transactions:
- a buy-back, under which the issuing insurer will be permitted to terminate annuity instalments in return for a lump sum payment to the annuitant
- assignment, under which the annuitant's right to annuity instalments is assigned to a third party for a lump sum.
Annuities that are held by occupational pension schemes as income producing assets will be out of scope.
For a more detailed description of the options for sellers, please see our other briefing note about HMRC's April 2016 consultation "Creating a secondary annuity market: tax framework".
Consultation runs until 21 June 2016.
FCA draft rules
Early Government consultations focused on the opportunities presented by a new market. In anticipation of the considerable risks that the market might bring, the FCA is now looking at a regulatory framework to protect consumers.
Many regulated firms will be familiar with the general approach, if not the detail. The FCA will build a new framework of regulation into the Handbook to address a broad range of topics and some of the highlights are listed below.
New regulated activities: the Handbook will be updated to reflect these new regulated activities:
- entering into a regulated annuity assignment as a purchaser
- entering into a regulated annuity buyback agreement as an annuity provider
- regulated annuity broking.
Disclosure: normal financial promotion rules will apply to this market. In their first communication Firms must recommend that the seller takes advice and seeks guidance from Pension Wise and shops around. If the value of an annuity is over a certain amount, annuity providers will be required to check that 'appropriate advice' has been taken.
The FCA will make a number of risk warnings available to firms for use when they are approached by an annuitant.
Contingent beneficiary consent: many annuities continue to another person (known as the 'contingent beneficiary') after the death of the main annuitant. The FCA proposes that the consent of the contingent beneficiary should be obtained before the assignment or buy-back takes place.
Presentation of offers: the proposed new Rules introduce a new requirement for the firm to provide the annuitant an indicative purchase price on the open market for the annuity income he or she is giving up. It is hoped that presenting this information will give the seller a sense of the difference between what they are being offered and what it would cost to replace the lost income.
Charges: Commissions from buyers to brokers will be prohibited. Also, annuity providers will be permitted to recover only reasonable costs from a transaction.
Compensation and prudential arrangements: consumers will be provided with access to FOS and the FSCS.
Mental capacity of the seller: the FCA will provide guidance for firms which will echo the consumer credit rules (CONC).
Tertiary market: the FCA anticipates the onwards sale by assignment of annuities by the purchasers developing into what it calls a tertiary market. The FCA will regulate transactions carried out by way of business, but not where an annuity is reassigned to individual retail investors.
Securitised secondary market: if annuity incomes are packaged into special purpose vehicles they will qualify as non-mainstream pooled investments which cannot be promoted to retail investors.
The draft Handbook text in this consultation takes the early proposals a large step forward and demonstrates the Government's intention to implement the changes. CP16/12 will therefore be of substantial interest to annuity providers, advisers and other potential participants in this market.
The new requirements to include a comparison between the offered price and the purchase price of a comparable annuity together with the advice and guidance requirements may in practice have little effect on the behaviour of annuitants. It remains to be seen whether this regime will help annuitants achieve a positive outcome.
The new requirement to obtain the consent of the contingent beneficiary may be straight forward for a typical case, but it is not difficult to see how complications might arise where:
- he or she is a dependant who is a minor and who therefore cannot give consent
- he or she is a separated spouse who remains entitled to a dependant's pension and may be uncooperative
- the annuity could continue to more than one person each of whom has a different view about assignment.