Selling Endowment Information

It sets out to consult with all industry parties to determine the way forward, to ensure that members of the UK public are made aware of their options when considering surrendering an endowment policy, to include the specific option of selling their endowment policy as an alternative to simply surrendering the endowment policy back to the originating life office.

1.3 There is nothing new about selling a life policy and assigning all rights of ownership to a third party. However, over the last 10 years or so, this market has grown considerably and has become a good deal more sophisticated.

1.4 We, and many others, continue to stress the need for consumers to look upon a life policy as a long term investment, the full benefits of which can only be realised if it is held to maturity. However, it is a simple fact of life that, in some cases, unexpected circumstances arise and make it no longer sensible for the consumer to sustain his or her investment in a life policy and prompt a decision to realise its value.

1.5 In March 2001, PIA issued guidance (Regulatory Update 85) in which it asked provider firms to take steps to ensure that policyholders considering the surrender of a life policy were informed that they may be able to trade that
policy instead.

1.6 The rules we propose to make are limited to giving effect in FSA rules to the PIA guidance already in place.

Traded endowment policies

3.4 Policyholders may believe that the only way forward is to surrender the endowment policy and take the cash. No one may have explained the alternatives, at least one of which may prove a better fit with the policyholder’s financial needs. It is, therefore, at this point that policyholders need to be told what their other options are –
• to make the endowment policy paid up where there is no need to realise a cash sum
• to use the endowment policy as security for a loan
• to trade the endowment policy in the expectation that this will generate a higher cash return.

3.5 In all cases it will be important to emphasise the potential benefit to the policyholder of taking advice before deciding what would be the best thing to do in the light of existing circumstances and the outlook for the future.

3.6 We would not expect any policyholder to be advised to surrender or sell an endowment policy as anything but a last resort. However, if at the end of the day, that is his or her decision, that decision will have been taken on an informed basis.

3.7 Where the policyholder has decided to explore the trading option, interest is likely to focus on –
• understanding the benefits and the risks
• understanding the process
• ensuring that the sale is completed and the money is paid.

3.8 Unless policyholders are already aware of the endowment trading option and how to go about it (for example, directly with an endowment market maker), they are likely to get in touch with the endowment issuing life office or an independent financial adviser. In the latter case, the endowment policyholder can expect to be advised of all the options, including whether trading is a possibility and, if so, whether it would be the best option to take.

3.9 It is where policyholders approach the issuing life office direct with, perhaps, a direction to surrender the endowment policy, that they are at greatest risk of losing out through ignorance or lack of understanding of the alternatives. Historically, some life offices have been reluctant to accept responsibility for informing such policyholders about the alternatives to surrendering a policy. They have not, for example, considered it to be their responsibility to tell policyholders how to dispose of their endowment policy and have been reluctant to get involved in the additional administrative effort in being a party to the sale of an endowment policy.

3.10 In March 2001, PIA issued guidance (Regulatory Update 85) – copy at Annex A - in which it asked endowment provider firms to take steps to ensure that policyholders considering the surrender of an endowment life policy were informed that they may be able to trade that endowment policy instead. The Regulatory Update noted that the FSA planned to consult at a later date about the introduction of rules to the same effect.

3.11 The rules we propose to make (see Chapter 3 and Annex B) would simply give continuing effect in FSA rules to the PIA guidance already in place. We are aware that there may be wider issues about the operation and implications of the traded endowment market that may need to be considered in due course (for example, how the interests of buyers and sellers interact, how endowment policies are priced and the potential effect on endowment surrender values). However, at this stage our focus is on carrying forward the requirement that policyholders be informed of the option to trade their endowment policy.

3.12 We will wish to be satisfied that firms have put the necessary management systems in place to meet the new disclosure requirement, including review of the effect of the rule on their handling of endowment surrender enquiries and their outcomes. We will also wish to be satisfied that firms have amended their literature accordingly.

Traded endowment policies

4.1 We propose that all life offices should be required to have arrangements in place to inform policyholders that, subject to eligibility and market demand, their endowment policy may be traded instead of surrendered. Annex B sets out the details of the changes we propose to make under our general rule making power (sections 138 and 157 of the FSMA).

4.2 There are a number of criteria which indicate whether an endowment policy can be traded. These are not new and some firms already inform endowment policyholders that they may trade their endowment policy on the basis of them. We would not expect firms to have to carry out significant and costly analysis of the traded endowment market to identify which endowment policies may be traded, as a consequence of our proposals.

4.3 But firms will need to be aware, in general terms, of what is being traded so that they can deal with some of the more straightforward questions endowment policyholders may ask. For example, currently secondary market makers are generally willing to buy traditional with-profits policies (in particular, endowments) which have been in force for at least 5 years and which have a minimum surrender value of Ł1000. But the market may change and firms will need to be generally aware when it does and what the implications are.

4.4 The proposed disclosure rule neither promotes nor supports the secondary market as such. There is no implication that firms are required to tell policyholders about the secondary endowment market, other than to make them aware
that it exists and how they might use it instead of surrendering their policy. Of course, if firms want to tell their endowment policyholders more about the endowment market and to guide them towards and through it, they will continue to be free to do so.

4.5 An alternative for the FSA might have been to require life offices to tell all policyholders who are surrendering their life policy (excluding a personal pension policy) that there is an alternative market where they might be able to trade their policy.

4.6 This option would mean that firms would not have a duty to assess whether their endowment policies were of a type that could be traded in the secondary market. We consider that the cost to firms of judging whether an endowment policy was likely to be tradable would not be significant. However, many policyholders with, for example, a unit linked contract, where there is very little secondary market activity, would have their expectations raised for no reason and would waste their time in trying to identify whether their endowment policy was tradable. There would also be costs to firms who had to deal with continuing enquiries from such policyholders. Our conclusion is that this alternative would be more costly than what we have proposed and would offer little or no additional benefits to policyholders. We have not therefore taken this option any further.

4.7 Alternatively, we could have adopted a more definitive view on what types of endowment policy are tradable and only require disclosure when an endowment policy of that type was surrendered. For example, we could say that all traditional with-profit policies should be considered as tradable. However, the market might change. Indeed, already there appears to be some interest in unitised with-profits endowment policies. We therefore concluded that any regulatory requirements should be flexible enough to allow for market developments. It would also have meant that we
would have to make prescriptive rules which would require rules changes and consultation. We take the view that the person best placed to judge whether a particular type of endowment policy is tradable in principle and to tell the policyholder, is the life office itself.

Q6: Do you agree that the basic disclosure requirement we have proposed would be a sensible and proportionate response to the need policyholders have for information about all of the alternatives to surrendering a life policy?

Annex A
Extract from PIA Regulatory Update 85 – Traded Endowment Policies
REGULATORY UPDATE 85 March 2001
Traded Endowment Policies
Product provider firms only

• Some with-profits endowment policies (normally only those that have been in force for at least 5 years) may be traded rather than surrendered.
Where this is the case, the policyholder can often expect to get a better cash value for the endowment policy than if it had been surrendered. PIA is of the view that policyholders should not surrender endowment policies without being aware that they may have the option to trade them instead.

• Provider firms are reminded of the guidance given in RU81 on the need for customers to be made aware of the consequences of surrendering a life policy and the help and support they might reasonably expect to get from firms in understanding this. Where a customer remains minded to surrender his or her endowment policy, it is just as important that he or she be informed that endowment surrender is not the only way forward and that one of the alternatives, which is to trade the endowment policy, may net them a higher cash sum.

• PIA does not have the powers under the Financial Services Act 1986 to place a specific duty on life offices to inform their policyholders that they may trade their endowment policies rather than surrender them. However, it considers that it is reasonable for policyholders to expect to be informed that, provided their endowment policy is eligible for trading, this option is open to them.

• Some provider firms, of course, already provide this information. Where this is not the case, PIA would ask those firms to take steps to ensure that this information is made available to their policyholders. Precisely when and how this is done is for firms to decide. Clearly, the latest possible time is when firms become aware of the intention to surrender - although even if the information has being given in earlier literature it would still seem appropriate to repeat it. It would not be reasonable to expect policyholders to have to rely on information given when they took out the endowment policy, because of the time that will likely have elapsed before they wish to surrender the endowment policy.

• IFAs are already subject to a Recommendation (Adopted FIMBRA Rules Appendix F6 Note F7) that, when being asked to arrange surrender of a with profits endowment policy, they should, where appropriate, advise that it may be possible to obtain a higher cash value through trading.

Information on selling endowments

To Sell Your Endowment Policy Phone - 0208 732 4071