Watchdog probes zombie investments scandal

TENS of millions of pensions and savings plans dating back decades face scrutiny by industry regulators in the latest blow to the reputation of Britain’s ­financial services sector.

Pensions, endowments, investment bonds and life insurance policies dating back to the 1970s are being scrutinised. Picture: Phil Wilkinson
Pensions, endowments, investment bonds and life insurance policies dating back to the 1970s are being scrutinised. Picture: Phil Wilkinson

The probe by the City watchdog centres on £150 billion of pensions, endowments, investment bonds and life insurance policies sold from the 1970s to the turn of the millennium, and could trigger demands for compensation from some investors.

The Financial Conduct ­Authority (FCA) will examine policies which penalise savers who want to switch providers with “unfair” terms and conditions. In some cases, those savers face losing up to half their cash.

Shares in some of Britain’s biggest insurers, including Standard Life, Aviva and Legal & General, slumped yesterday as news of the UK-wide investigation emerged.

It marks the third blow in a fortnight for the savings sector after Chancellor George ­Osborne announced in his Budget that retirees would not be forced to buy an annuity with their pension pots and news followed of a cap on workplace pension scheme charges.

The FCA review, which will look at a selection of the 30 million policies affected, is due to conclude by the end of the year.

One option would be to ban crippling exit fees on old and high-charging investments that are sometimes rarely checked.

The probe comes amid fears some firms have been unfairly using people’s pension and investment pots to cover bills from other parts of their business and giving priority to new customers at the expense of loyal policyholders.

It will be conducted in the wake of a number of scandals that have hit the financial services sector over the past few decades involving the mis-selling of policies such as mortgage endowments, pensions and payment protection insurance (PPI).

The investigation will look at what happened after people took out the so-called “zombie fund” policies, rather than how they were actually sold.

Zombie funds are dormant policies which are no longer sold to new customers. They may in some cases be losing money – but still incur significant management costs.

There are often lengthy waits and costs to leave them and join new schemes with greater benefits, according to industry reports.

The FCA stressed it was not planning to scrap exit penalties for all policies sold between 1970 and 2000, as long as they were compliant at the time.

A spokesman said: “These accounts have been closed for many years in some cases but there are still issues to be looked at around the question of the service that consumers receive in relation to those accounts.

“As a forward-looking regulator, we want to examine areas that are of interest and relevance to consumers and to firms and assess whether there is an issue that requires any action.”

The FCA may also consider asking firms to move customers to better products.