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FINAL NOTICE

1.
ACTION

1.1.
For the reasons given in this Final Notice, the Authority hereby imposes on The

Prudential Assurance Company Limited (“Prudential”) a financial penalty of

£23,875,000 pursuant to section 206 of the Act.

1.2.
Prudential agreed to resolve this matter and qualified for a 30% (Stage 1) discount

under the Authority’s executive settlement procedures. Were it not for this

discount, the Authority would have imposed a financial penalty of £34,107,200 on

2.
SUMMARY OF REASONS

2.1.
The Authority takes this action against Prudential for breaches of Principle 3

(Management and Control) and Principle 6 (Customers’ Interests) of the

Authority’s Principles for Businesses (“the Principles”) that occurred between 1

July 2008 and 30 September 2017 (“the Relevant Period") in relation to non-

advised sales of annuities to existing customers who were approaching retirement

and who may have been eligible for an enhanced annuity, or may have been

eligible for a better rate on the open market for either a standard or enhanced

annuity.

2.2.
By failing to take reasonable care to organise and control its affairs responsibly

and effectively, with adequate risk management systems, Prudential failed to pay

due regard to the interests of its customers and to treat them fairly.

2.3.
Prudential’s business model for annuities included using telephone calls to

maximise sales to existing pension customers. However, Prudential failed to

ensure that the documentation used by its call handlers was appropriate, and

failed to monitor their calls with customers adequately. Prior to 1 January 2013,

Prudential also used large, sales-linked incentive schemes for call handlers and

managers which increased the risk of inappropriate customer outcomes. These

weaknesses in Prudential’s systems and controls, combined with the complex

nature of annuities, and the potential vulnerability of customers, led to some

customers being treated unfairly and created a significant risk of consumer

detriment.

2.4.
Prudential failed to take reasonable care to organise and control its affairs

responsibly by having adequate systems in place to ensure that appropriate and

timely information about retirement options was provided to customers during the

course of those sales calls.

2.5.
The Authority has taken into account, and given credit for, the following:

(1)
On 2 February 2017, Prudential voluntarily agreed to conduct a past

business review of non-advised annuity sales in order to identify customer

detriment and pay proper redress to customers who are likely to have

suffered loss as a result of Prudential’s failure to comply with regulatory

requirements. Prudential is currently reviewing approximately 183,000 sales

of non-advised annuities, where customers may have been entitled to an

enhanced annuity. As at 19 September 2019, Prudential had offered

approximately £110 million in redress (i.e. including ongoing annuity uplifts)

to approximately 17,240 customers.

(2)
Based on the provision that Prudential established for the review at the 2019

half-year, the estimated total redress payable for the entire customer

population will amount to approximately £250 million. This total redress

figure covers back-payments and interest paid to affected customers to put

them in the position they would have been in had they bought an enhanced

annuity (with a higher rate than the annuity they in fact purchased) on the

open market at the point of retirement. This figure also includes uplifted

payments to affected customers at the enhanced rate for the rest of their

lives, in accordance with the terms of their annuity policy.

2.6.
Prudential has acknowledged its past failings and has sought to correct these by

compensating customers who were treated poorly. The Authority has taken this

into account as a mitigating factor in determining the level of financial penalty.

2.7.
Since February 2017, Prudential has, aside from some limited circumstances,

offered non-advised annuities only on behalf of an external panel of service

providers. It has otherwise closed its annuity product to new business.

2.8.
An annuity is an insurance contract that provides a customer with a guaranteed

income for life in return for a lump sum premium, usually paid from a pension

policy. It is a complex financial product for which the ordinary customer’s need

for accurate information is high. The decision on an annuity is final and

irrevocable, so it is important that a customer makes the right choice. This choice

can have a lasting impact because it affects customers, and sometimes those

dependent upon them, for the rest of their lives. This is particularly so in the

context of a non-advised sale, where the customer chooses their annuity product

based on factual information and does not receive financial advice about which

specific product would be most suitable for their individual needs.

2.9.
As part of the sales process, firms are required to explain to customers that they

may get a better annuity rate if they shop around on the open market, so that

they can make an informed decision regarding their choice of annuity product.

This is known as the “Open Market Option”.

2.10.
Where customers have a shortened life expectancy because of specified health or

lifestyle conditions, such as a heart condition, high blood pressure or smoking,

they may be eligible for an enhanced annuity which would pay a higher income.

This is on the basis that the annuity would likely be paid for a shorter period.

Therefore, it is important that the firm obtains adequate information from the

customer to determine whether they may be eligible for an enhanced annuity,

and provides clear, fair and not misleading information about enhanced annuities.

The nature and extent of enhanced annuities available in the market changed

during the Relevant Period with a broader range of conditions being covered and

enhanced annuities becoming more widely available over time.

2.11.
During the Relevant Period Prudential failed to:

(1)
Implement adequate call handler documentation to ensure that relevant and

important information, particularly in relation to the Open Market Option and

enhanced annuities, was provided to customers in a consistently clear, fair

and not misleading way;

(2)
Implement adequate systems and controls to monitor calls between call

handlers and customers;

(3)
Implement adequate systems and controls to mitigate the risk that

Prudential’s financial interests, and those of its call handlers, were prioritised

above fair customer outcomes; and

(4)
Follow up sufficiently on issues identified during the monitoring of calls.

2.12.
Prudential failed to take reasonable care to organise and control its affairs

responsibly and effectively, with adequate risk-management systems, by using

inappropriate (and sometimes high-level) call handler documentation, and failing

adequately to monitor calls between call handlers and customers. These failings

created a significant risk that during telephone calls with its non-advised

customers Prudential would fail to provide them with appropriate and timely

information about:

(1)
The possible financial benefits of an enhanced annuity;

(2)
Their potential eligibility for an enhanced annuity;

(3)
The option to shop around for an annuity or enhanced annuity on the open

market;

(4)
The possibility that different firms may apply different eligibility criteria for

enhanced annuities; and

(5)
The possibility that different firms may pay more (or less) income under an

enhanced annuity.

2.13.
During the Relevant Period, Prudential’s sales strategy operated on the basis of

its understanding that it held a significant share of the UK market in pensions and

annuities. Its non-advised annuity business focused on selling annuities directly

to existing Prudential pension policyholders as they approached retirement.

Prudential knew that these customers tended to buy an annuity from Prudential

because it was convenient to do so and because they were considered to be an

established brand. However, at the same time, many of them could get a higher

income in retirement by shopping around for an annuity, or an enhanced annuity,

on the open market. Prudential was aware that the annuity rate it offered existing

customers was regularly 10% lower than the best rate available by alternative

annuity providers.

2.14.
It was therefore important for Prudential to ensure that all existing customers

were provided with sufficient information about their right to shop around for the

best annuity, even if that made it less likely that they would buy an annuity from

Prudential. Prudential failed to do so, and as a result profited from the loyalty and

inertia of some customers. It therefore failed to act in the best interests of some

of its existing customers during the Relevant Period, and to treat them fairly.

2.15.
As existing customers approached retirement, Prudential wrote to them enclosing

packs containing information about their retirement options and Prudential’s

pension-related products. The timing and content of these packs were subject to

specific regulatory requirements. They were required to, and did, contain

adequate information about the customer’s potential eligibility for an enhanced

annuity, and about their option to shop around for an annuity on the open market.

2.16.
However, as well as sending the required written information, Prudential

communicated with many of its customers by telephone, either by proactively

calling them or by inviting them to call Prudential. These sales calls were handled

across several sales channels. Prudential was required to pay due regard to the

interests of its customers, and to treat them fairly. It was required to provide

them with adequate and timely information in order to make decisions about their

retirement income.

2.17.
Between 1 July 2008 and April 2015 Prudential approved and provided

documentation for use by call handlers in non-advised telephone conversations

with customers which created a significant risk that Prudential would fail to

provide them with appropriate and timely information about their retirement

income. Whilst some of Prudential’s documentation for use by call handlers did

not comply with regulatory requirements, the documentation improved during the

Relevant Period such that the degree of non-compliance towards the end of the

Relevant Period was lower than at the beginning of the Relevant Period.

2.18.
In particular, the call handler documentation created a significant risk that during

the course of telephone calls with customers, call handlers would make

statements which may have discouraged the customer from shopping around for

a better deal on the open market. This was because some of the call frameworks

used during the Relevant Period directed call handlers to make statements either

before or after referring to the Open Market Option, that may have dissuaded the

customer from shopping around.

2.19.
For example, in March 2009 a customer contacted Prudential by telephone to

discuss taking his retirement options. This was the customer’s only telephone call

with Prudential, during which the single reference the call handler made to the

customer’s right to shop around for an annuity on the open market was as follows:

Call handler: “Okay, so there is one last option where you could transfer the funds

out to another pension provider, so you said you want to start taking benefits

now?”

Customer A: “Oh yeah, well I’ve got to get something moving from your side

basically.”

Call handler: “Definitely, I’ll definitely arrange for that.”

2.20.
In May 2009, another customer called Prudential stating that they wished to

purchase an annuity. The call handler explained that the customer had the right

to exercise the Open Market Option and that this meant they could purchase an

annuity from another provider. However, the call handler immediately

undermined the verbal statement about the Open Market Option by saying:

“[…] and obviously you do have the right to your Open Market Option, which

means that you can buy your annuity from other providers but of course we would

like you to stay with Prudential, okay?”

2.21.
A call framework used between June 2009 and February 2010 instructed call

handlers to provide customers with a shopping around message, and follow it

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“[…] but of course we would like you to stay with Prudential. We were voted 'Best

Annuity Provider' by the independent magazine, Moneywise four years in a row

2004, 2005, 2006 and 2007.”

2.22.
Frameworks for use between 2013 and 2014 then instructed call handlers to

commence their shopping around message with:

“Although you’ve been a customer of Prudential (since xxxx / a number of years)

2.23.
Further, some of Prudential’s sales scripts, used by call handlers at various points

between 2010 and 2015, required no mention of the Open Market Option at all.

Prudential in some cases omitted or undermined information about the Open

Market Option and failed to ensure that call handlers followed the content of call

frameworks by adhering to the requirements set out in them.

2.24.
During the Relevant Period, Prudential’s systems and processes for monitoring

telephone calls were inadequate because they failed to:

(1)
Consistently monitor a sufficient number of calls with customers across the

entirety of the Relevant Period;

(2)
Apply sufficiently rigorous criteria to the calls monitored; and/or

(3)
Ensure that when problems were identified relating to communication of

information to customers on enhanced annuities and the Open Market

Option, they were adequately responded to and dealt with.

2.25.
By failing to put in place appropriate and sufficient systems and controls Prudential

created a risk that customers would not be provided with timely, relevant and

adequate information during oral communications with call handlers. This created

an unacceptable risk that customers would not be able to make an informed

decision about whether to exercise their open market option or explore eligibility

for an enhanced annuity either with Prudential or on the open market.

2.26.
For example, a customer telephoned Prudential to inform them that they suffered

from asthma. The call handler confirmed that Prudential would not offer an

enhanced annuity based on asthma but failed to inform the customer that they

may have been able to find an alternative provider who might pay an enhanced

income based on their medical condition. The call handler also failed to ask

questions in relation to lifestyle conditions.

2.27.
Between 1 July 2008 and 1 January 2013, this risk was increased by Prudential’s

use of large, sales-linked incentives for call handlers and their managers. Certain

features of Prudential’s incentive structures created a significant risk that call

handlers might prioritise their own financial interests ahead of appropriate

customer outcomes when making a sale.

2.28.
For example, the average annual bonus a Prudential call handler could expect

between 2009 and 2012 was an additional 37% on top of their base salary. For

sales managers, the average bonus they could expect during this period rose to

40% on top of their base salary.

2.29.
Between 2009 and 2012, in addition to the sales-related bonus scheme, call

handlers also participated in sales-linked incentive schemes called “competitions”.

Through these “competitions”, call handlers who achieved the highest value of

sales (while meeting the qualifying compliance criteria) won prizes such as spa

breaks or weekend holidays abroad.

2.30.
Robust checks and balances were therefore required to mitigate the risks to

consumers caused by this pressure to sell. This in turn meant that enhanced

monitoring of customer calls was required to ensure that clear, fair and not

misleading information was consistently provided to customers and that they were

treated fairly.

2.31.
The combined effect of the failings created a significant risk of poor outcomes for

customers who may have been eligible for a better deal on the open market.

Prudential’s systems and controls failings created a significant risk that customers

would not obtain fair and favourable outcomes. This is particularly serious for the

following reasons:

(1)
The weaknesses in Prudential’s sales and monitoring procedures were

systemic, including its management systems and internal controls relating

to the sale of annuities;

(2)
Annuities are a complex financial product for which the ordinary customer’s

need for accurate information is high;

(3)
The choice of a particular annuity is final and can affect customers, and

sometimes their dependants, for the rest of their lives;

(4)
Some of the customers purchasing annuities were potentially vulnerable.

These customers often depended on Prudential to provide them with

appropriate and timely information;

(5)
Prudential’s conduct created a significant risk that customers would not be

provided with appropriate and timely information in a clear, fair and not

misleading way, or be treated fairly;

(6)
Customers who were eligible for an enhanced annuity may have lost, and in

some cases did lose, money as a result; and

(7)
The Authority and other industry bodies had published material relevant to

the sale of enhanced annuities.

2.32.
The Authority hereby imposes on Prudential a financial penalty of £23,875,000

pursuant to section 206 of the Act.

2.33.
Any facts or findings in this Notice relating to any function, committee or group

of persons should not be read as relating to all the members of that function,

committee or group, or even necessarily any particular individual.

3.
DEFINITIONS

3.1.
The definitions below are used in this Notice:

“ABI” means the Association of British Insurers.

“the Act” means the Financial Services and Markets Act 2000.

“the Authority” means the body corporate previously known as the Financial

Services Authority and renamed on 1 April 2013 as the Financial Conduct

Authority.

“COBS” means the Authority’s Conduct of Business Sourcebook.

“Open Market Option” means the option to use the proceeds of a pension to buy

an annuity on the open market.

“Principles” means the Authority’s Principles for Businesses set out in the

Authority’s Handbook.

“Prudential” means The Prudential Assurance Company Limited.

“Relevant Period” means the period from 1 July 2008 to 30 September 2017.

“Tribunal” means the Upper Tribunal (Tax and Chancery Chamber).

4.
FACTS AND MATTERS

Overview of the corporate structure of Prudential during the Relevant
Period

4.1.
Throughout the Relevant Period, Prudential was a subsidiary of Prudential Plc and

offered life insurance, pension products and pension annuities to its customers.

4.2.
Between 1 July 2008 and 30 September 2017 Prudential’s business included the

non-advised sale of standard and enhanced annuities to its existing pension

holders.

4.3.
Although annuities were principally sold through Prudential, Prudential Retirement

Income Limited (“PRIL”) and Prudential Distribution Limited (“PDL”) also carried

out functions connected to Prudential’s sales of annuities. These functions

included, for example, writing shareholder annuity business and outsourcing.

However, the majority of annuities were sold to customers directly by Prudential.

4.4.
Prudential also outsourced activities connected to its annuities business to various

third parties. Although these sales were carried out by third parties, Prudential

retained responsibility for ensuring that the sales complied with the relevant

requirements, including the adequate monitoring of calls.

Overview of Prudential’s annuity sales process and strategy

4.5.
Prudential offered private pensions to retail customers, who would make regular

pension contributions. When they reached retirement, in order to convert their

pension into a regular income, customers generally had to purchase an annuity.

Existing customers did not have to purchase a Prudential annuity and could shop

around for more competitive rates offered by other annuity providers. During the

Relevant Period, Prudential was required to make its pension customers (including

those who may have been eligible to purchase an enhanced annuity) aware of

their option to shop around, which is known as the “Open Market Option”.

4.6.
In order to do this, Prudential wrote to existing pension policyholders in the run

up to their intended retirement dates (which would be either a date that the

customer had indicated or their state pension age). These planned written

communications, which were regulatory requirements, consisted of:

(1)
A “Wake-up Pack” posted to the customer between four to six months before

the customer’s intended retirement date, which included information on the

customer’s right to shop around for the best deal on the open market; and

(2)
A “Retirement Pack” which was a “reminder pack” posted to the customer

six to ten weeks before the customer’s intended retirement date. This

reminded the customer of their right to shop around and would include a

quotation showing the lump sum available in the customer’s pension plan.

4.7.
If the customer wanted to purchase a Prudential annuity, the sale could be

conducted during a telephone call with a call handler. The customer would then

receive a “Follow-up Pack” based on the quoted annuity rate.

4.8.
Both the Wake-up and Retirement Packs contained written information on

enhanced annuities and the right to shop around in line with regulatory

requirements at the time. Customers were encouraged in the Wake-up Pack

information brochure to telephone Prudential if they wished to discuss taking their

retirement. However, the vast majority of customers simply responded to the

packs Prudential sent to them with little, if any, further interaction. For that

reason, Prudential considered its distribution model for internal vestings to be

extremely efficient in terms of maintaining a steady revenue stream in this area.

4.9.
Alternatively, when a customer contacted Prudential seeking a retirement

quotation before having received a Wake-up Pack, Prudential sent them a “Vesting

Pack.” This contained an information brochure and other materials, as well as the

requested quotes, and an application form.

4.10.
The sending of these packs could result in further communications between

Prudential and its customers; for example, if customers telephoned Prudential

after receiving one of the three packs described above.

4.11.
Prudential also telephoned some customers proactively, particularly those with

higher-value pension pots, in order to discuss their retirement options.

Accordingly, the extent to which Prudential interacted with customers prior to

completion of a sale varied depending on a number of factors, including how much

money they had to buy an annuity. For some customers, the interaction was

entirely in writing. For others, it included telephone conversations.

4.12.
If, after any further interaction with Prudential, the customer completed and

returned an application form, the annuity was then set up and the sale was

complete.

4.13.
Prudential’s revenue stream from retirement-income business was fed

substantially by its very large book of existing pension customers. Prudential’s

objective was to maintain market leadership in annuities by maximising “capture

of internal vestings”. There was therefore a strong focus on retaining existing

customers so as to convert their pension maturities into annuities with Prudential.

Existing customers who vested their pension pots internally with Prudential were

seen to be crucial to delivering Prudential’s strategy relating to annuities and

internal vestings.

4.14.
Prudential recognised that many of its existing pension customers were not likely

to switch providers. This was because through brand loyalty and inertia they

tended to purchase an annuity from Prudential, even if the price might be higher.

Prudential was also aware that its customers suffered from “significant information

gaps around enhanced annuities” and recognised that “inertia and the size of their

pot (i.e. small) are key barriers” to shopping around.

4.15.
Prudential was also aware that the proportion of its customers who were either

unaware of the Open Market Option, or who bought an annuity without shopping

around, was higher than the market as a whole. This meant that many of

Prudential’s customers may not get the best annuity rate available to them when

purchasing a standard or an enhanced annuity.

4.16.
Between 2009 and 2011, the annuity rate offered by Prudential to an existing

customer in exchange for their pension pot was regularly 10% lower than the best

rate available on the open market, as was broadly the case throughout the

Relevant Period.

4.17.
Despite its lower annuity rates, Prudential’s customer retention rate was high.

Prudential considered its maturing pensions book to present a significant

opportunity to maximise profits and that it represented the mainstay of

Prudential’s profitability. This dependence on internal vestings meant that

Prudential considered the Open Market Option to be a “threat” to maximising its

revenue in this area, although there is no evidence that Prudential sought to

counteract that “threat” by knowingly breaching the relevant regulatory

requirements.

The ABI Code

4.18.
In September 2011, the Association of British Insurers announced its intention to

introduce a mandatory “Code of Conduct on Retirement Choices”. A consultation

document and draft version of the ABI Code were published in December 2011

and the final version of the ABI Code was published in March 2012. The ABI Code

came into force in March 2013.

4.19.
The ABI Code introduced a number of requirements relating to the content of

written communications. It also applied several requirements to the sales process,

including that:

“Providers must not send an annuity application form to customers in either the

wake-up packs or follow-up packs. An annuity application form must not be sent

until contact has been made between the customer and a provider.”

4.20.
Before sending the customer an application form, the ABI Code required firms to

obtain from the customer responses to five key questions about the customer’s

retirement choices, including:

“Whether they have any lifestyle or medical conditions that may mean they are

eligible for an enhanced annuity.”

Prudential’s response to the ABI Code in 2013

4.21.
The key objective of the ABI Code was to equip customers with the information

they needed to understand their options, shop around and make an informed

decision about their income needs in retirement.

4.22.
Prudential recognised that complying with the ABI Code presented two main

challenges. The first was that it would need to alter a significant number of its

processes relating to the sale of annuities. The second was that it would need to

alter its approach by engaging with customers earlier, to ensure it minimised the

impact of the ABI Code on Prudential’s vesting and customer-retention objectives.

4.23.
Prudential identified that the key risk posed by the ABI Code was to its vesting

sales. In February 2012 Prudential began its “ABI OMO Project.” A key objective

of the project was designing a customer journey that was both compliant with the

Code but which also was intended to minimise the loss of customers between the

time that customers received an Open Market Option statement in the Wake-up

Pack and the time that they were sent an Open Market Options reminder in the

Follow-up Pack as they approached retirement.

4.24.
In response to the ABI Code, Prudential altered its sales process in 2013 as

(1)
Prudential included a “Declaration” form in the Wake-up Pack, asking the

five key questions about the customer’s retirement choices that were

required by the ABI Code. This included asking whether the customer had

any lifestyle or medical conditions that may have meant they were eligible

for an enhanced annuity. The customer was encouraged to complete and

return the declaration form. This was preferable for Prudential as it was the

most cost-effective way to obtain the necessary responses.

(2)
Prudential telephoned its higher-value customers who did not return the

form, in order to obtain the necessary responses orally. This is because it

was important to Prudential to retain their custom as their larger pension

pot was vital to maximising revenue in this area.

(3)
Once Prudential had received the customer’s responses, either by telephone

or in the declaration form, it included an application form in the Retirement

Pack (the reminder pack) that was sent to the customer six to ten weeks

before their intended retirement date in accordance with the applicable

regulatory requirements.

4.25.
The introduction of the declaration form meant it remained possible for customers

to complete the purchase of an annuity without interacting with Prudential by

telephone.

4.26.
Obtaining the customer’s responses to the five questions as early as possible in

the sales process was considered to be key to protecting Prudential’s internal

vesting rates. Prudential’s primary objective was that an application form be sent

to the customer as early as possible in the sales process so as to maximise the

probability of securing a sale.

4.27.
When a paper declaration was returned or a declaration discussion took place over

the telephone, call handlers or back-office staff added a marker to the system to

denote that the customer understood their retirement choices. However, there

was no safeguard to check that they had actually understood the key points.

4.28.
It is particularly important that consumers have access to helpful information that

enables them to make well-informed decisions about their retirement options.

Subsequent changes to the sales process in 2014

4.29.
Subsequent key changes to the annuity sales process were as follows:

(1)
From September 2014, “declaration forms” asking the five ABI Code

questions were not included in the Wake-up Pack. This meant that all

customers were required either to telephone, or to be telephoned by,

Prudential so that the five questions could be asked of them by a call

handler.

(2)
From March 2015, application forms were not included in Retirement Packs.

Customers would only be sent an application form once Prudential had

sufficient information to send them tailored personal quotes taking into

account their particular circumstances.

(3)
From 10 October 2016 to the end of the Relevant Period, call handlers were

told that Prudential did not proactively offer to send quotes to customers for

customer-initiated sales, unless the customer requested them.

Overview of call handler documentation

4.30.
During the Relevant Period, the documentation generally used by call handlers at

Prudential as part of the non-advised annuity sales process included:

(1)
Call frameworks which set out the topics to cover with the customer as well

as the order in which to address them, when discussing the customer’s

retirement options by telephone; and

(2)
Call standards which set out the criteria that call handlers were expected to

meet. These were the criteria against which calls were assessed by

managers and others specifically tasked with this role, such as compliance

and internal audit.

4.31.
Prudential’s “call frameworks” set out wording to cover certain subjects which was

described either as “mandatory” or “suggested” wording. The subjects that had

to be covered with a customer varied according to the customer’s responses, but

included topics such as the Open Market Option and enhanced annuities.

4.32.
This meant that the call handler needed to make a judgement call in order to

navigate to the appropriate section of the call framework as the telephone call

progressed.

4.33.
Call frameworks also included wording for call handlers to use regarding the

purpose of the calls themselves. For example:

(1)
“explain that as the customer is coming up to retirement they will/may have

receive(d) quotes for their pension and that they have lots of things to

consider and have some important decisions to make as the pension is for

the rest of their life. The reason you are calling is to help explain what the

customer has received, the options available, and [sic] ensure the customer

is comfortable with what they need to do.”

(2)
“My job today is to guide you through your Pack, answer any questions and

give you the facts so that you can choose what suits your needs best. […] If

at any point you’re unclear or don’t understand any aspect of what I’m

saying, please stop me. It’s really important to us that you understand what

you need to [sic] in order to make your decision. I cannot give you any

advice or recommend what would be suitable for you. At the end of this call,

you should have everything you need to make an informed decision.”

4.34.
The call frameworks changed over time and different call frameworks applied to

different groups of customers depending on the types of pension they held.

Different call frameworks could also apply depending on whether the customer

had already had a previous telephone conversation with Prudential. Prudential has

been unable to provide the Authority with a comprehensive record of all the

various call frameworks.

4.35.
Like the call scripts, the content of the criteria set out in the “call standards”

changed during the course of the Relevant Period in response to evolving

regulatory or business requirements, such as the introduction of the ABI Code in

2013. The criteria included the Open Market Option and enhanced annuities.

4.36.
The call frameworks were used on the assumption that Prudential would train call

handlers to appropriately navigate the document and use the mandatory or

suggested wording. However, there was no process in place to check whether a

customer had properly understood what they had been told. This was particularly

important given the type of customer, who may have been vulnerable and possibly

overwhelmed by complex financial information and the choices they needed to

make.

4.37.
There was a risk that, if call handlers did not follow the frameworks, important

information, particularly in relation to eligibility for enhanced annuities and the

option to shop around, might not be provided to the customer in a clear, fair and

not misleading way. This created the risk that some customers who may have

been eligible for an enhanced annuity might make decisions based on unclear

information that could have a detrimental impact on the income they were entitled

to receive during retirement.

What Prudential directed call handlers to tell customers about enhanced

annuities

4.38.
During the Relevant Period, Wake-up Packs and Retirement Packs sent to

Prudential customers generally contained information about the advantage of

seeking an enhanced annuity and how the customer might be eligible for

enhancement. For example, an information brochure sent to a Prudential

customer in their Wake-up Pack in 2008 included the following:

“If you suffer from poor health or have a long-term medical condition, you may

feel that you will never receive the full benefit of an annuity. However, this is one

instance where poor health can actually work in your favour.

If you have an existing medical condition and a total pension fund of £20,000 or

more after taking any tax-free cash, you may qualify for an enhanced annuity

rate.

If you have a pension fund(s) of £20,000 or more and you or your partner are

suffering from a serious medical condition, you may be able to get a higher than

normal pre-tax retirement income.

Medical conditions that may qualify are those that are likely to shorten your life

such as stroke, some cancers, diabetes, or disease of the kidneys, heart or lungs.

In most cases, you will be provided with [a] quotation using the information

collected from your completed medical questionnaire. For more serious

conditions, you may need to provide detailed medical evidence. This means that

the process will take a little longer, and it will enable you to get the best possible

terms.”

4.39.
Many customers also had telephone communications with Prudential call handlers,

sometimes prompted by the information brochure in the Wake-up Pack which

encouraged customers to contact Prudential to discuss their retirement income

options. If a customer informed Prudential during a telephone conversation that

they might have a qualifying medical or lifestyle condition, Prudential sent the

customer a medical questionnaire to complete and return.

4.40.
Prudential then used this medical questionnaire to decide whether to offer the

customer an enhanced annuity, and if so, what annuity rate to offer them. If a

customer did not indicate that they might have a qualifying medical or lifestyle

condition, Prudential sent them quotes and an application form for standard

annuities only.

4.41.
It was therefore important that Prudential provided customers with appropriate

and timely information during telephone conversations to determine whether the

customer might have a qualifying medical or lifestyle condition. Although call

handlers were expected to cover the subject of enhanced annuities during these

conversations, the quality of call handler documentation dealing with this subject

varied during the Relevant Period.

4.42.
For example, a call framework in use between October and December 2008

included the following text in relation to enhanced annuities:

If not previously covered on warm up call – Confirm if the customer (or anyone

else named on the policy) is potentially eligible for a medical enhancement on

their quote.

4.43.
This high-level call framework did not adequately set out how the topic of

enhanced annuities should be covered, nor did it say what content needed to be

covered by the call handler. It did not specify whether the call handler must cover

lifestyle factors, as well as medical conditions. It also did not specify whether the

call handler was required to explain the advantages of seeking an enhanced

annuity and that other providers may pay a higher rate of income (or cover

particular health or lifestyle conditions that Prudential did not) on the open

market.

4.44.
The frameworks for Warm-up and Follow-up calls to customers before and after

that main call did not require any mention of enhanced annuities either. This

meant that there was a risk that the call handler could place the onus on the

customer to decide which medical conditions might be relevant or that the

customer would have to volunteer information without knowing what might be

relevant.

4.45.
Between 2010 and 2012 call frameworks contained the following suggested

“Can I ask if you and your spouse/partner are in good health? If you have any

illnesses or lifestyle conditions that may shorten your life expectancy we may offer

an enhancement to your Income. Examples include certain types of cancer,

diabetes, or High Blood Pressure. Do you think this would benefit you? (If so

explain medical process)”.

Changes made in 2013 following the ABI Code

4.46.
The call frameworks used did not direct call handlers to cover potential eligibility

for an enhanced annuity in the context of the Open Market Option, for example

that other providers might pay a higher rate or might cover certain health

conditions not covered by Prudential.

4.47.
In response to the ABI Code the call frameworks changed in respect of enhanced

annuities so that call handlers were directed to ask the following question to cover

both medical and lifestyle conditions:

“Do you/your partner currently have, or have ever had a medical or lifestyle

condition, such as smoking?”

4.48.
If the customer disclosed either a medical or lifestyle condition, this was to be

noted by the call handler so that it could be followed up in any subsequent

telephone conversation. The call handler was then directed to say the following to

the customer, before proceeding through the other matters in the call framework:

If Yes: “Thank you for sharing that information with me. You will receive a pack

in xxxxx (month) which will not include the information you have told me, as it’s

really important to us that we have an accurate understanding of your medical/

lifestyle circumstances at the point you are ready to take income from your

pension”

“At that time we would like to speak to you again and I’ll set up a time and date

for us to call you back. I’ll do this later in this call. How does that sound?”

“Do you have an email address? I’ve got some really useful information that I can

send to you that will help you. In the meantime have a look at Page xx in the

booklet. It will give you more information on the eligibility/whether you are

eligible”

4.49.
If the customer did not indicate a medical or lifestyle condition they were given a

further explanation:

If No: “To reassure you the reason I’m asking is because there are certain

conditions which could result in you getting more money, even everyday things

like high blood pressure and high cholesterol”.

4.50.
At the end of the call, the call handler was directed to schedule a follow-up call

with the customer if the customer had disclosed a medical or lifestyle condition

that might mean they were potentially eligible for an enhanced annuity. If the

customer had not disclosed such a medical or lifestyle condition, they were simply

encouraged to contact Prudential after receiving a set of quotes.

4.51.
Between the declaration call and the follow-up call, the customer was sent a

Follow-up Pack. These were referred to internally as “Quote Packs”. These packs

contained an information brochure, as well as a key features document, annuity

quotes, and an application form to complete the purchase of an annuity. These

quotes were for standard annuities only, even if a customer had indicated a

possible qualifying medical or lifestyle condition during a declaration call. This was

mitigated by the fact that customers who had disclosed a medical or lifestyle

condition were told not to send off their application form until they discussed with

Prudential their potential eligibility for an enhanced annuity.

4.52.
“Follow-up” calls (referred to internally as “Quote Pack calls”) were then intended

to take place after the customer had received a Quote Pack. No quotes for

enhanced annuities were generated until after the Follow-up call had taken place.

4.53.
Call frameworks for Follow-up calls included the following process for following up

on the issue of enhanced annuities:

(1)
If the customer had not previously indicated any condition, they were asked

if this was still the case. If it was still the case, and their first indication had

been during a previous call, the call framework addressed only the option of

the customer taking a standard annuity.

(2)
If it was still the case, and their first indication had been given on the

declaration form, they were to be told the following:

“To reassure you the reason I’m asking is because there are certain

conditions which could result in you getting more money, even everyday

things like high blood pressure, high cholesterol, diabetes and smoking all

the way down to cancer and heart disease.

From what your [sic] telling me this isn't relevant to you – is that right?”

(3)
Thereafter, the call handler was directed to proceed through the remaining

matters in the call framework.

(4)
If the customer had indicated a condition during the declaration call or on

the declaration form, or if the customer indicated a condition during the

Quote Pack call, the call handler considered this condition against a list of

qualifying medical or lifestyle conditions.

(5)
If the customer disclosed a qualifying condition, they were sent a full medical

questionnaire, and a further follow-up call was scheduled to take place once

the underwriting decision had been made.

(6)
If the customer disclosed certain lifestyle conditions, the call handler was

directed to ask them a short series of questions, and then assess their

answers against a given list of outcomes. This process was known internally

as “light vetting” to assess potential eligibility for an enhanced annuity.

(7)
If the customer’s responses to the light vetting questions indicated that they

might qualify for an enhanced annuity, the call handler was directed to send

their responses to colleagues in Prudential’s Central Processing Team in

order to make an underwriting decision. A further Follow-up call was then

scheduled to take place once the underwriting decision had been made.

(8)
If the customer disclosed a condition that did not make them potentially

eligible for an enhanced annuity, or if the customer’s responses to the light

vetting questions indicated that they did not qualify for enhancement, the

call handler was directed to inform them of this in the following terms:

“Thanks for sharing that with me. Based on what you have told me, you

would not be eligible to get a higher income based on your health.”

(9)
Call handlers were then directed to proceed through the remaining matters

in the call framework. If no further telephone call was required as a result

of any pending underwriting decision, the call framework explained that the

call handler could offer the customer assistance in completing the application

form for a standard annuity. Once the application form was submitted by

the customer, the sale of the annuity was then complete and the annuity

was set up.

(10) However, if a further telephone call was required as a result of a pending

underwriting decision, the call handler was directed not to offer any

assistance in the completion of the annuity application form. The call handler

was also directed to discourage the customer from completing the

application form at that stage, before the further telephone call.

Call frameworks for use during Customer-initiated calls

4.54.
Call handlers used different call frameworks for conversations with customers who

contacted Prudential seeking retirement quotations before having received a

Wake-up Pack (this pack was a regulatory requirement). From January 2013, the

first such telephone conversation with the customer was referred to internally as

an “Ad Hoc 1” call.

4.55.
Call frameworks for these “Ad Hoc 1” calls directed call handlers to obtain

responses to the five questions in a similar fashion to the declaration call. In

relation to enhanced annuities, call handlers were directed to ask:

“Can I ask, do you (or Mrs xxx) currently have or have ever had a medical or

lifestyle condition? Such as smoking?”

4.56.
Unlike the declaration call, however, this information was acted on immediately

(as it was in a Quote Pack call):

(1)
If the customer disclosed no condition, the call handler was not required to

take any action.

(2)
If the customer disclosed a qualifying condition, they were sent a full medical

questionnaire or referred for a telephone medical interview.

(3)
If the customer disclosed certain lifestyle conditions, the call handler was

directed to conduct the “light vetting” procedure to determine whether they

would be sent a full medical questionnaire or referred for a telephone

medical interview. This consisted of asking the customer questions about

blood pressure, cholesterol and smoking and applying their responses to a

metric in the framework to return a decision.

4.57.
If the customer disclosed a condition that did not qualify for enhancement, or if

the customer’s responses to the light vetting questions indicated that they did not

qualify for enhancement, the call handler was directed to inform them of this in

the following terms: “Thanks for sharing that with me. Based on what you have

told me, you would not be eligible to get a higher income based on your health.”

4.58.
The call handler was then directed to proceed through the remaining matters in

the framework and a Follow-up call was arranged for approximately one week

later. In the interim, the customer was sent a pack containing quotes for standard

annuities only, and an annuity application form.

4.59.
These Follow-up calls were referred to internally as “Ad Hoc 2” calls. Call

frameworks for “Ad Hoc 2” calls directed call handlers to follow up on the enquiries

made in the “Ad Hoc 1” call:

(1)
If the customer had disclosed a condition but no underwriting decision was

yet available to the call handler, a further Follow-up call was scheduled to

take place once an underwriting decision had been made. If the customer

was entitled to a higher income, Prudential then sent a new quote with the

revised income levels.

(2)
If the customer had disclosed a condition and an underwriting decision was

available to the call handler, the call handler was directed to inform the

customer of the decision and, if successful, of the higher rate being offered.

(3)
If the customer had disclosed no condition, the framework did not direct the

call handler to raise the subject of enhanced annuities.

4.60.
Call handlers were then directed to proceed through the remaining matters in the

call framework. If no further Follow-up call was required as a result of a pending

underwriting decision, then the call handler could offer the customer assistance

with completing the application form. Once the form was submitted by the

customer, the sale was complete and the annuity was set up.

4.61.
However, if a further Follow-up call was required as a result of a pending

underwriting decision, the call handler was directed not to offer any assistance in

the completion of the Annuity application form, and to discourage the customer

from submitting the application form before their further Follow-up call. This is

similar to the position for sales that arose after the Wake-up pack had been sent.

4.62.
On further Follow-up calls, call handlers were directed to follow an “Underwriting

Decision Framework”. This call framework did not direct call handlers to inform

customers of their Open Market Option at the point they were given the

underwriting decision. They then proceeded through the remaining matters in the

framework. This included assisting with completion of the annuity application form

as needed. Once the form was submitted by the customer, the sale was complete

and the annuity was set up.

2015 to 2017

4.63.
Prudential introduced new call frameworks for call handlers from 6 April 2015.

These incorporated the new retirement options that became available to their

customers from that date as a result of the legislative changes known as “Pensions

Freedoms”.

4.64.
The first call with customers for both firm-initiated and customer-initiated sales

was referred to internally as “Pension Options Call 1”. The call frameworks for

these calls directed call handlers to enquire as to the customer’s potential

eligibility for an enhanced annuity through a similar process as that used for

“Quote Pack” calls and “Ad Hoc 1” calls. Customers would then be referred for a

medical underwriting interview, or sent a questionnaire, or approved for

enhancement via light vetting.

4.65.
Additionally, if a second “Pension Options” call was required because the customer

was undecided between buying an annuity or opting for an income drawdown

arrangement, Prudential guidelines required call handlers to cover enhanced

annuities with the customer again.

Developments in call handler documentation regarding the Open Market

Option

2008 to 2010

4.66.
From the start of the Relevant Period until April 2010, call handler documentation

required call handlers to tell customers about their Open Market Option, but it did

not require them to inform customers that by shopping around they might be able

to obtain a higher income in retirement from a different provider.

4.67.
For example, a call framework for use between October 2008 and December 2008

merely directed call handlers to “Ensure the customer is aware that they have the

right to exercise their Open Market Option”. The frameworks for “Warm-up” and

“Follow-up” calls to customers before and after this call did not require any

mention of the Open Market Option at all. For Prudential customers, this meant

that a single, brief mention of the Open Market Option might be the only reference

to it throughout the course of their telephone communications with Prudential.

4.68.
This was the case for Customer A, who contacted Prudential by telephone in March

2009 as he was approaching his 65th birthday, because he wished to discuss taking

his retirement. The call handler who spoke to Customer A took him through his

potential annuity options and stated that he would then immediately issue him

with quotes. The only reference to Customer A’s right to shop around for an

annuity on the open market during the call was as follows:

Call handler: “Okay, so there is one last option where you could transfer the funds

out to another pension provider, so you said you want to start taking benefits

now?”

Customer A: “Oh yeah, well I’ve got to get something moving from your side

basically.”

Call handler: “Definitely, I’ll definitely arrange for that.”

4.69.
Customer A was not told during the telephone call why he might wish to consider

shopping around for annuity and that by doing so he might be able to obtain a

better income for the rest of his life. Neither was he given information about how

he might go about shopping around, or where he might obtain further information

about doing so.

4.70.
The call handler did not make a reasonable effort to ensure that the customer

understood the options available to them during the call, including the option to

shop around for a better deal. The call handler also combined mentioning the right

to shop around with a question about how soon Customer A wanted to begin

taking his benefits.

4.71.
The call handler did not make the customer aware that they might be eligible to

purchase an enhanced annuity subject to certain health or lifestyle conditions.

The call handler also failed to make the customer aware of the potential for an

uplift on their retirement income.

4.72.
The call handler did not inquire as to whether Customer A had any health or

lifestyle conditions, nor inform Customer A of how certain conditions might lead

to eligibility for an enhanced annuity and therefore higher payments. This was the

only telephone conversation Customer A had with Prudential as part of his

purchase of an annuity.

Discouraging the customer from shopping around

4.73.
Call handler documentation used on Prudential’s primary sales channel from the

start of the Relevant Period until April 2010 directed call handlers to make

statements immediately before or after the “shopping around” message that could

discourage the customer from shopping around, such as by referencing loyalty to

Prudential or emphasising the benefits of buying an annuity from Prudential. This

also had the effect of undermining the written material that had been provided to

customers in the Wake-up or Retirement packs that were provided in accordance

with regulatory requirements.

4.74.
For example, in May 2009, Customer B called Prudential stating that they wished

to purchase an annuity. The call handler discussed Customer B’s options and

issued quotations following the call. The call handler explained that the customer

had the right to exercise the Open Market Option and that this meant they could

purchase an annuity from another provider. However, the call handler

immediately undermined the verbal statement about the Open Market Option by

“[…] and obviously you do have the right to your Open Market Option, which

means that you can buy your annuity from other providers but of course we would

like you to stay with Prudential, okay?”

4.75.
This also had the effect of undermining the written material on the Open Market

Option that had been provided to the customer pursuant to regulatory

requirements. The call handler failed to explain that the customer might obtain a

higher income by shopping around. The Open Market Option was not addressed

during any subsequent calls. The call handler did not ask whether the customer

had a medical or lifestyle condition, nor explain that other providers might offer

more favourable annuity rates in respect of particular conditions.

4.76.
A call framework for use between June 2009 and February 2010 on Prudential’s

primary sales channel contained the following suggested wording:

“I must make you aware that you do have the right to take your open market

option, which means you can buy your annuity from other providers, but of course

we would like you to stay with Prudential. We were voted 'Best Annuity Provider'

by the independent magazine, Moneywise four years in a row 2004, 2005, 2006

and 2007.”

2011 to 2014

4.77.
From December 2011, primary sales channel call handler documentation was

changed as so to require call handlers to inform customers that by shopping

around they might be able to obtain a higher income in retirement from a different

provider. In January 2013, these changes were also made to Prudential’s

secondary sales channel call handler documentation.

4.78.
In November 2011 Prudential removed any explicit appeal to the customer’s

loyalty to Prudential (alongside informing the customer of their right to shop

around for an annuity on the open market) from call handler documentation for

use in Prudential’s main sales channel.

4.79.
However, until 2014 call handler documentation continued to direct call handlers

to remind customers of the length of the customer’s relationship with Prudential

immediately prior to informing them of their Open Market Option. This

undermined the written Open Market Option information that was provided to

customers under regulatory requirements. For example, two call frameworks for

use between 2013 and 2014 contained the following mandatory wording:

“Although you’ve been a customer of Prudential (since xxxx / a number of years),

You don’t have to take your pension with us. You can shop around, and depending

on the choices you make, you may get a higher income elsewhere.”

4.80.
From November 2013 call handler documentation for use on Prudential’s primary

sales channel also directed call handlers to reinforce the importance of shopping

around if the customer referenced loyalty to Prudential. For example, a call

framework in use in March 2014 included the following direction:

“Reactive – if customer references loyalty (for example, “I’ve always been with

Thank you, but keep in mind you could get a higher income or have other options

if you shop around.”

4.81.
Between January 2013 and November 2014 call handler documentation on

Prudential’s secondary sales channel also directed call handlers to remind

customers of the length of the customer’s relationship with Prudential immediately

prior to informing them of their Open Market Option.

4.82.
From March 2015 Prudential discontinued this approach so that call handler

documentation for use on Prudential’s secondary sales channel directed call

handlers to reinforce the importance of shopping around if the customer

specifically referenced loyalty to Prudential.

Failure to mention the option of shopping around for an enhanced annuity
during calls with customers

4.83.
Between the start of the Relevant Period and April 2015 call handler

documentation used by Prudential in its primary sales channel did not require call

handlers to inform customers that different providers apply different enhancement

criteria, and that they might therefore wish to shop around for an enhanced

annuity.

4.84.
For example, in November 2012, Customer C called Prudential stating that they

wished to take their pension pot as a lump sum upon retirement. During this call,

the call handler discussed Customer C’s annuity options and issued C with

quotations. The call handler informed Customer C of the Open Market Option,

enquired about Customer C’s health and explained that “health or lifestyle

conditions” might result in a higher income. However, no examples of qualifying

health or lifestyle factors, such as high blood pressure or smoking, were provided.

4.85.
Two weeks later, Customer C informed Prudential that they suffered from asthma.

The call handler confirmed that Prudential would not offer an enhanced annuity

based on asthma, whilst noting that Customer C was right to have brought it to

the firm’s attention. However, the call handler failed to inform the customer that

they may have been able to find an alternative provider who might pay an

enhanced income based on their medical condition. The call handler also failed to

ask questions in relation to lifestyle conditions during this call or the earlier call.

4.86.
A draft version of a call framework for use in 2013 included a reviewer’s comments

as follows:

“Although you’ve been a customer of Prudential since (xxxx / a number of years),

You don’t have to take your pension with us. You can shop around, and depending

on the choices you make, you may get a higher income elsewhere.”

A reviewer then commented: “Are we comfortable not mentioning that other Co’s

may offer enhanced terms? (following press complaint)”

4.87.
Call handler documentation in use on Prudential’s primary sales channel in 2016

did not direct call handlers to inform customers of their option to shop around for

an enhanced annuity when informing them of the Prudential underwriting decision

regarding eligibility for an enhanced annuity. This meant that, although Prudential

could not offer enhanced terms, they did not explain that other firms might be

able to. An internal review at Prudential recommended that this be changed in

March 2016.

4.88.
Call handler documentation for use on Prudential’s secondary sales channel from

January 2013 to March 2015 only directed call handlers to inform customers of

their option to shop around for an enhanced annuity if the customer’s fund value

was, or might be, below the threshold for them to be eligible for an enhanced

annuity with Prudential. This was because Prudential was keen to retain its

customers, particularly those with higher-value pension pots. For example:

“IF VALUE MAY BE LESS THAN £10k AFTER TFC

Prudential may offer an enhanced annuity that will provide a higher income

depending on your lifestyle and medical history. Your fund value needs to be more

than ten thousand pounds after tax free cash to qualify with us. Other annuity

providers may offer this for a lower fund value.

Value is less than £10K after TFC

As I mentioned before, here at Prudential we can only offer a higher income if you

have more than ten thousand pounds after you tax free cash payment. You can

take your money with another provider on the open market and they may offer a

higher income.”

4.89.
Call handler documentation for use on Prudential’s secondary sales channel

between January 2013 and March 2016 did not direct call handlers to inform

customers of their option to shop around for an enhanced annuity on the open

market when informing them of potential eligibility for an enhanced annuity with

Prudential as a result of the “light vetting procedure”.

4.90.
However, from March 2016 call handlers were directed to inform customers of

their option to shop around for an enhanced annuity on the open market if they

did not qualify for enhancement with Prudential. For example:

“Thanks for sharing that information with me. Based on what you have told me

you would not be eligible to get a higher income based on your health / lifestyle.

There is nothing more we need to do on this call and as my colleague discussed

the key considerations on your earlier call, what I will do now is organise for

standard quotes to be issued to you to allow you to proceed with taking your

pension income.

However, it is important to be aware that different providers may assess your

health or medical situation differently, which could mean that other providers

could offer you a higher or lower income than what Prudential will offer you. This

is why it is important you shop around and obtain comparison quotes to get the

best deal for you”

Not mentioning the Open Market Option at all

4.91.
Three categories of Prudential call handler documentation required no mention of

the Open Market Option at all:

(1)
Frameworks between 2010 and 2011;

(2)
“Ad Hoc Call 2” frameworks between 2013 and 2014; and

(3)
“Underwriting Decision” frameworks between 2013 and 2015.

4.92.
The frameworks that were in place between August 2010 and December 2011

were intended for use during the main telephone call with customers, during which

call handlers discussed the customer’s annuity options. These required call

handlers to refer to the Open Market Option if customers indicated a desire to

bring additional pension funds from other providers to Prudential. However, unlike

frameworks for the same call prior to August 2010, they were not required to

inform customers of their option to shop around for an annuity on the open market

instead of vesting with Prudential.

4.93.
Call frameworks for “declaration calls”, “Quote Pack calls”, and “Ad Hoc 1” calls

did require the call handler to cover the Open Market Option. Research

commissioned by Prudential in November 2012 suggested that the shopping

around message contained in call handler documentation for the declaration call

was clearly received by customers in test versions of the call.

4.94.
However, call frameworks used on Prudential’s primary sales channel for the ”Ad

Hoc Call 2” call between 2013 and 2014 did not direct call handlers to mention

the customer’s right to shop around for an annuity on the open market at all. It

was in the course of these Ad Hoc Call 2 conversations that customers were

informed of whether they qualified for an enhanced annuity from Prudential, and

at what rate. It was once in possession of this information that the customer would

have been able to compare the annuity rate being offered to them by Prudential

against what was available on the open market.

4.95.
Despite this, the Ad Hoc Call 2 call framework allowed call handlers to progress

to the point of offering to assist the customer with the completion of the annuity

application form, without the customer being reminded of their option to shop

around during the call.

4.96.
In 2013, Prudential used an “Underwriting Decision” framework for calls informing

customers of their eligibility for an enhanced annuity with Prudential following an

underwriting decision based on their medical or lifestyle information. This

framework did not require call handlers to mention the customer’s option to shop

around for an annuity on the open market.

4.97.
For example, a customer who did not qualify for an enhancement above the

standard annuity rate offered to them by Prudential was to be informed as follows:

“When we spoke last week, you mentioned that you have a medical or lifestyle

condition which could mean you are entitled to more money. This information was

passed to our underwriting team who have given us a decision.”

“The decision returned to us showed that in fact our standard annuity rates (for

the postcode where you live) gives you a higher level of income than the income

you would receive based on your medical/ lifestyle conditions.”

4.98.
Immediately after that, the call handler could proceed through the framework to

the point of assisting the customer with the completion of an application form:

“Now when we last spoke you had (got a clear idea of/ narrowed down) the

annuity option(s) that suit(s) your circumstances and the additional features you

may like to add. This was / These were [read back customers product summary]

So your income would be, as we discussed last week, £xx per year.” [repeat for

each option as relevant] “What are you thoughts?” Are you happy to go ahead

with this quote?” Listen/ Acknowledge

If yes – Ok that’s great. The next step is to complete your application form. Do

you have the pack we sent you to hand? […]”

4.99.
A further example arose during a call with Customer D in March 2012, which

included discussion of Customer D’s annuity options. The call handler failed to

mention the Open Market Option and to discuss the customer’s health and its

possible impact on the level of D’s retirement income. This was the final telephone

call between Customer D and Prudential. Although annuity options had been

discussed during a previous call in September 2011, there was no mention of the

Open Market Option or the possible availability of an enhanced annuity during

that call either.

Developments in call frameworks between 2016 and 2017

4.100. In 2016 Prudential introduced a mandatory set of Retirement Risk Warnings in

relation to both annuities and enhanced annuities and the risk of not shopping

around. This provided additional protection to customers. However, Prudential

was still required to ensure that customers were provided with appropriate and

timely information regarding retirement income during sales calls, prior to the

warnings being issued.

4.101. From 12 May 2016 to the end of the Relevant Period call frameworks for use on

Prudential’s primary sales channel stated that Prudential expected most

customers to be able to get a better rate elsewhere:

“If you decide that an annuity is right for you, it is important to know that you

don’t have to stay with Prudential.

You should shop around for your annuity as depending on the choices you make

and also your health, we expect the majority of our customers to be able to get a

higher income elsewhere.”

4.102. Between February and October 2016, call frameworks for use in Prudential’s

secondary sales channel also included a requirement to inform customers that

Prudential expected most customers would be able to get a better rate elsewhere.

Training of call handlers

4.103. Training for call handlers varied across Prudential’s sales channels. From May 2009

to the end of the Relevant Period, call handlers employed in Prudential’s main

sales channel were required to undergo structured training. This included initial

training as part of a formal induction programme; ongoing training required to

maintain competence; training to update sales staff on changes to processes,

products and regulatory expectations; and remedial training.

4.104. From the start of the Relevant Period until at least 2011, call handlers on

Prudential’s primary sales channel were told as part of their induction training that

they would be individually responsible for hitting specific sales targets. They were

also trained to emphasise the benefits of taking an annuity with Prudential.

Compliance-related topics were another key part of Prudential’s call handler

training: Sales staff were required to complete and pass all regulatory / product

tests within set timescales, to adhere to compliance process and procedures as

outlined in the compliance manual and to adhere to TCF guidelines. From 1

January 2013, Prudential stopped using sales targets for individual call handlers.

However, increasing the “vesting rate” of call handlers remained a priority from a

training perspective.

Financial Incentives

4.105. Between 5 March 2009 and 31 December 2012, call handlers and sales managers

at Prudential were incentivised through:

(1)
Bonuses (the size of bonus paid was linked to total value of annuity and

pensions sales secured); and

(2)
Incentive schemes, called “competitions” where staff could win prizes based

on volume of sales.

4.106. The bonus paid to an individual call handler could form a significant proportion of

their total annual remuneration. For example, the Authority reviewed the annual

fixed basic salaries and the sales-related bonuses earned by Prudential call

handlers between 2009 and 2012. During this period, call handlers earned a

substantial annual sales-related bonus, receiving on average more than 37% of

their basic salary.

4.107. Between 2009 and 2012, in addition to the sales-related bonus scheme, call

handlers also participated in sales-linked incentive schemes called “competitions”.

Through these “competitions”, call handlers who met all qualifying criteria (which

included compliance checks) achieved the highest value of sales won prizes such

as spa breaks or weekend holidays abroad.

4.108. Between 2009 and 2012, sales managers, who were responsible for line

management of call handlers, were also eligible for substantial sales-linked

bonuses. During this period most sales managers earned a substantial annual

bonus, receiving on average more than 40% of their basic salary.

4.109. Although there is no evidence that call handlers intentionally disregarded the

Sales Standards, the competitive features of Prudential’s incentive schemes

created an increased risk of mis-selling and a risk that call handlers might

prioritise their own financial gain when making a sale. Nonetheless, these local

competitions and prizes continued until 2013. Until that time there remained a

strong incentive for call handlers and managers to prioritise and maximise internal

vestings (albeit their performance was also being assessed by reference to

compliance obligations). This continued from the start of the Relevant Period until

Prudential ended the practice of offering sales-linked bonuses and competitions

to call handlers and managers on 1 January 2013.

4.110. To mitigate the risk of call handlers failing to meet compliance requirements,

bonus payments in respect of sales of annuities were also linked to certain

compliance criteria. From the start of the Relevant Period, Prudential call handlers

and their managers were required to achieve certain minimum standards relating

to call quality, complaints and regulatory compliance, including Treating

Customers Fairly, in order to be eligible for a bonus. There is no evidence that

sales incentives caused call handlers or managers to breach these minimum

standards. Prudential has not been able to provide evidence that it reduced bonus

payments in respect of communications involving enhanced annuities and the

Open Market Option.

4.111. With regard to the sale of annuities, only the minimum compliance standards had

to be met in order to qualify for a bonus. It was therefore possible for a call

handler to commit compliance errors without there necessarily being an impact

on his or her bonus.

4.112. By contrast, a failure to meet a sales target would have a direct effect on the size

of a call handler’s bonus, since all sales above the minimum threshold to qualify

for a bonus would automatically affect the size of the bonus awarded. In 2009,

this threshold was 70% of a call handler’s individual sales target. This further

increased the risk that call handlers might prioritise securing an annuity sale over

fully communicating appropriate and timely information to a customer about their

options for their retirement income.

4.113. Throughout the Relevant Period, Prudential monitored telephone conversations

between customers and call handlers in relation to the provision of information

about enhanced annuities and the Open Market Option.

4.114. Robust call monitoring was required to mitigate the risks to customers posed by

call frameworks which at times during the Relevant Period were high-level and

did not always provide sufficiently specific guidance to call handlers as to what

they needed to cover during calls with consumers.

4.115. Some call frameworks used during the Relevant Period afforded a discretion to

call handlers as to how they covered the topic of the Open Market Option and

health and lifestyle conditions, for example. Robust monitoring was also required

in order to mitigate the risk that incentives with higher-risk features (that were

used by Prudential until 1 January 2013) could encourage call handlers to

prioritise their own financial interests over customer outcomes. However, the

primary purpose of the call monitoring was to check and ensure adherence to call

scripts, albeit that the scripts may not have ensured that customers were treated

fairly.

4.116. Throughout the Relevant Period, Prudential monitored telephone communications

between call handlers and customers. The nature and extent of this monitoring

varied during the course of the Relevant Period and across the different channels

through which Prudential sold annuities.

4.117. Routine call monitoring was undertaken by sales managers (who had direct line

management responsibility for call handlers), a dedicated first-line monitoring

function, and/or a second-line compliance function. Calls could also be monitored

as part of specific reviews undertaken by the compliance (second-line) and audit

(third-line) functions.

2008 to 2012

4.118. The monitoring assessment criteria varied significantly during the Relevant Period

and at times were inadequate. For example, in a set of call standards from June

2009, call handlers were required to “check if anyone named on the annuity may

be eligible to apply for a medical enhancement under current limits”. A failure to

meet this requirement was regarded as a breach rather than a process error.

However, the standards did not specify exactly what a call handler was required

to say for the requirement to be satisfied.

4.119. The standards did not require call handlers to ask for information on medical and

lifestyle conditions, past and present, for the customer or the customer’s spouse

(if any). The June 2009 call standards also required call handlers to “explain the

Open Market Option to the customer ensuring they are aware of being able to

take [sic] annuity with any provider”. Failure to meet this requirement was also

classed as a “breach”. However, the call standards did not require the call handler

to explain the main benefit of shopping around for an annuity, or to provide any

guidance to the customer on how to go about shopping around.

4.120. From 1 January 2010, the call standards for Prudential’s primary sales channel

were grouped as “Cat A” and “Cat B” criteria in its “Business Quality Framework”.

Failure to meet all Cat A criteria would result in the call audit overall being classed

as a “fail”. A “Cat B” fail would be noted but could still result in an overall “pass”.

Failure to meet “enhancement requirements” was classed as a “Cat A” fail where

it created the potential for financial impact to the customer. However, failure to

inform a customer of their Open Market Option was regarded as a “Cat B” failure

and did not by itself result in a call being classed as a failure overall.

4.121. Where a customer was made aware of their Open Market Option, but it was not

explained to them that by shopping around they could obtain a higher income in

retirement, a call was nevertheless classed as a pass, despite the failing needing

correcting in a follow-up call. Similarly, where a call handler failed to inform a

customer of their Open Market Option, but the customer was passed on to a

Prudential financial advisor (instead of continuing with a non-advised purchase),

the call was classed as a pass.

4.122. From January 2011, a failure to enquire as to the customer’s eligibility for an

enhanced annuity in relation to the customer’s spouse was also capable of

amounting to an error, classed as either “Cat A – Major”, “Cat B – Minor”, or

“Quality/Development”, depending on whether a medical questionnaire or quotes

were also sent to the customer.

4.123. Where errors were detected, they were logged and corrective action by the call

handler was required, such as contacting the customer by telephone and covering

the relevant material.

4.124. The Business Quality Framework was changed in August 2012 and the monitoring

criteria were re-classified as follows:

“Cat A – High Risk – error is likely to cause a significant impact to the

customer’s buying decision. (Red flags!)

Cat B – Medium Risk – error will have a minimal impact to the customer and the

point in question is clearly covered by output the customer has received

(providing there has been sufficient signposting to this during the call)


Cat C – Low Risk – very minimal impact to the customer’s buying decision.

Generally more business related requirements rather than regulatory

requirements.”

4.125. The pass rate was as follows:

“Cat A – target 80% pass rate”

“Cat B & C– target 70% pass rate”

4.126. The annuity standards from August 2012 included as indicative guidance:

“Cat A

Eligible person not aware that past or present health or lifestyle condition may

entitle them to receive a higher income

Customer not informed of the OMO”

“Cat B

Customer informed of OMO but not been made aware that this could potentially

give them a higher income”

2013 to 2016

4.127. A new Quality Assurance Framework was introduced in 2013, to support

implementation of the ABI Code requirements. It was intended to be

straightforward and clear, and capable of use across all non-advised annuity call

types. It set out a total of 56 standards that were applicable to particular calls.

Calls were then assigned an overall performance score based on the percentage

of applicable standards that were achieved, as well as a pass/fail score in relation

to treating customers fairly.

4.128. A failure in relation to the enhanced annuity standard would negatively impact the

overall performance score and result in a fail on the customer fairness score. The

standard was as follows:

“All eligible person(s) are aware that health or lifestyle condition(s) may entitle

them to receive an enhancement to the annuity income

The caller is able to make an informed decision on whether this is relevant to their

health circumstances”

4.129. A failure in relation to the Open Market Option standard would negatively impact

the overall performance score and result in a fail on the customer fairness score.

The Open Market Option standard was as follows:

“Customer has been informed of their right to shop around and that by doing so,

this could potentially give them a higher income.”

4.130. However, in practice it remained the case that a failure to mention the Open

Market Option could be classed as a “performance error” only, rather than

impacting the customer fairness score. This meant that the standards were not

always correctly and consistently applied during the monitoring process. In one

example, a customer was considering bringing their pension from another

provider to Prudential, and the call handler failed to cover their option to shop

around with their Prudential fund. This was classed as a performance error only,

rather than impacting customer fairness, despite the customer needing to be re-

contacted to correct the failure.

4.131. From September 2014, the Open Market Option requirement was improved to

require call handlers to inform customers that another benefit of shopping around

is the availability of a greater range of options:

“Customer has been informed of their right to shop around and that by doing so,

this could potentially give them other options and potentially a higher income.”

4.132. Prudential’s call standards were then significantly changed in response to the

to February 2016, the requirements for the Open Market Option were:

“It is made clear to the customer at regular appropriate points in the interaction

that there are other products/options available on the open market option which

may be more appropriate to their needs and the customer is encouraged to shop

around and informed of how to do this.

The customer is reminded about shopping around throughout the conversation

Where [Prudential] are unable to provide an option or where a customer’s

health/lifestyle condition is not considered by Prudential, then the customer is

reminded that this product/option may exist on the open market.

Where customer provides any objections to shopping around, or references loyalty

to Pru, consultant re-emphasis [sic] the importance/benefits of shopping around.”

4.133. For enhanced annuities, the requirements for the Open Market Option were:

“Execution Only – relevant only where customer is choosing an annuity option

Info/Help – The customer is informed on when their health or lifestyle can and

cannot be considered in the various options available to them. Where considering

an annuity all eligible person(s) are questioned on their past and present health

and lifestyle conditions and the relevant underwriting route is followed.

The customer is able to make an informed decision on whether their health or

lifestyle conditions is relevant to the course of action they wish to take when

accessing their pension fund.”

4.134. In some cases where call monitoring revealed a failure to meet the assessment

criteria in relation to enhanced annuities, this did not necessarily result in a call

being regarded as a fail overall. For example, in some instances a call handler

should have referred a customer to colleagues who would then have made an

underwriting decision based on potential eligibility, but instead told them that

their condition would not qualify for enhancement. The call was then still graded

as a “pass” overall, even though the customer should have been referred for an

underwriting decision on eligibility.

4.135. From October 2015, the enhanced annuity requirement was:

“All eligible person(s) are aware that past/present health or lifestyle condition(s)

may entitle them to receive an enhancement to the annuity income

Where customer is undecided on whether to take an annuity or drawdown product,

the customer is aware that their health could result in a higher income, but that

this would not apply under any income taking [sic] from drawdown.

Where customer is potentially eligible for an enhanced annuity, the consultant

takes the correct underwriting route, and asks all relevant questions (e.g. light

vetting questions)

Where appropriate, any enhancement decision is provided accurately”

4.136. The Quality Assurance Standards for annuity conversations on Prudential’s

primary sales channel from February 2016 required the following in relation to the

(1)
“The benefits and reason why customer should shop around on the open

market is provided (i.e. other providers might be able to offer different

products/options that might suit their needs better, or may be able to offer

a higher income)

(2)
The customer is made aware of how they can shop around

(3)
The customer is recommended/encouraged to shop around at all relevant

points in the conversation. For example :-

a)
Where customer specifies an option that Prudential does not offer, the

consultant reinforces the shopping around message

b)
Where customer has a non-qualifying health condition, the consultant

signposts that other providers may consider this and be able to offer an

enhanced annuity.

c)
Where customer meets our enhanced annuity criteria, customer is

informed that other providers may assess/underwrite differently and

could offer a higher or lower income, which is why should shop around.

(4)
Where customer expresses loyalty to Prudential, the consultant should

reinforce the benefits of shopping around

(5)
The consultant should not obscure or undermine the importance of shopping

around, which could result in the customer believing it unnecessary or would

not be beneficial.”

Second-line monitoring – Risk Assurance and Compliance

4.137. Prudential’s second-line compliance team conducted a review of operations on

Prudential’s primary sales channel in August 2009. It monitored a sample of

annuity sales calls to assess whether they complied with Prudential’s standards in

relation to Treating Customers Fairly. The team also compared the results of its

monitoring to those of Prudential’s dedicated first-line monitors (the “Business

Quality Team”) for the same calls.

4.138. Prudential’s compliance team reported that 25% of the annuity sales calls

assessed did not comply with either internal processes or regulatory

requirements. Specifically, the review found that in five of the 36 annuity calls

reviewed, the call handler failed to disclose all information relating to the Open

Market Option and “Full Transfer” found within the “suggested wording” of the call

framework. For two of the 36 calls, the review disagreed with the Business Quality

Team’s decision not to class the call as a fail overall. The review identified changes

that were required to add clarity to parts of the call frameworks and standards,

as well as the need for increased ongoing monitoring of call handlers.

4.139. Prudential’s compliance team reviewed a sample of 20 annuity calls as part of a

wider review of operations on Prudential’s primary sales channel in 2010. It found

that the call handlers “met the appropriate standards during calls as a part of the

non-advised sales process, acted within their remit of providing information that

is clear, fair and not misleading and did not give advice to customers”. It also

found that Prudential’s first-line monitoring function (the Business Quality Team),

“is operating well within the agreed [business quality] audit criteria, identifying

key issues to be fed back to the Sales Consultants and ensuring that customer

contact takes place to rectify issues identified”.

4.140. In November 2011 Prudential’s compliance team reviewed the non-advised

annuity sales process within its primary sales channel for compliance with internal

and regulatory standards. It monitored a sample of 40 calls. It found that calls

were generally meeting the required standards and providing sufficient

information to enable customers to make appropriate and informed decisions.

However, it found that Prudential’s first-line monitoring function, the Business

Quality Team, had failed to identify issues in 17.5% of calls monitored as part of

the review.

4.141. Prudential’s compliance team then carried out a review of customer

communications on part of its primary sales channel in March 2012. This particular

team conducted conversations with customers to discuss their retirement options,

as a “warm up” to then pass the customer on to call handlers on Prudential’s

primary sales channel. The review reported:

“Regulatory requirements are to make customers aware of the Open Market

Option between four to six months before the customers’ intended retirement.

This is met by sending the customer literature. In the event that the customer

seeks advice or to purchase from Prudential, then the OMO is a mandatory part

of the sales process. The [team’s] policy is to raise the OMO when annuity options

are mentioned in conversations. We found that there is inconsistency between

[call handlers], with some providing OMO when others, with similar conversations,

did not. [Business quality] audit standards are not currently completely clear on

this issue with regards to warm up calls.”

4.142. Prudential’s compliance team reported on verbal communications in relation to

enhanced annuities and the Open Market Option on its primary sales channel in

March 2013, as the ABI Code was coming into force. It concluded that, as against

the standards in place on Prudential’s primary sales channel at that time, in 98%

of calls the Open Market Option message had been “communicated clearly and

effectively” and “for enhanced we demonstrated this in 96% of calls”.

4.143. Prudential’s compliance team reported on compliance with the ABI Code on its

primary sales channel in September 2013. It reviewed a sample of calls that had

not been reviewed as part of first-line monitoring. It found that “[a]pproximately

20% of cases fail the [business quality] customer outcome requirement”. It

recommended improvements to call frameworks, on the basis that "Providing

examples of both applicable medical and lifestyle conditions should be mandatory.

Also, we found information stated on the eligible conditions was incorrect in one

framework".

4.144. In October 2013 Prudential’s compliance team then reported again on compliance

with the ABI Code on its secondary sales channel. It reported that: “There are

some shortfalls and/or areas where further revisions need to be made to the

documented frameworks to demonstrate full compliance with the ABI Code and

to ensure the correct customer outcomes are achieved”. It also reviewed 30

customer calls and found that 5 of these calls did not comply with the ABI Code.

One of the recurring problems observed was that “there needs to be an adequate

discussion around the applicable medical and lifestyle conditions with potential for

receiving an Enhanced Annuity”.

4.145. In November 2014, Prudential’s second-line compliance team reported on

compliance with the ABI Code on its primary sales channel. A sample of 82 calls

was monitored. Compliance issues were identified on 5 calls, representing 6% of

the sample, which required further customer contact to rectify the “customer

outcome”.

4.146. In November 2014, Prudential’s compliance team again reported on compliance

with the ABI Code on its secondary sales channel. A sample of 32 non-quality-

assured calls was monitored and a sample of call frameworks was reviewed. The

report found that “significant changes” had been made following the 2013 review,

but that “some areas for improvement in the quality of call handling, call handler

competency and call frameworks” remained. The review also found that the

reporting of quality assurance results for “ABI OMO calls” was potentially

misleading.

4.147. Prudential’s second-line compliance team carried out a review of customer

communications on Prudential’s secondary sales channel in May 2016. This was

partly in response to the Authority’s Thematic Review of Annuity Sales Practices

published in October 2016. The review monitored 30 customer calls, across a

range of pension products and retirement options. Its findings in relation to

enhanced annuities and the Open Market Option included:

“To establish eligibility for enhanced annuities, customers should be asked about

health and lifestyle conditions. In 7 of the 16 calls where this should have

occurred, it did not. In 4 calls, incorrect or incomplete information was given which

could have affected the customer’s understanding and as a result, whether they

explored their eligibility for an enhanced annuity.

The Open Market Option (OMO) message for shopping around should have been

provided to customers in 16 of the 30 calls. In 5 of these 16 calls, the message

was not given and in an additional 6 calls, the OMO message was either weak or

incomplete. Customers should also be given information as to how to shop around

and where to find this information. In 8 of the 16 calls this did not occur. In 1 call,

shopping around was not directly mentioned alongside the drawdown product and

in another call the call handler did not check if the customer had Money Advice

Service (MAS) information to refer to.”

4.148. The May 2016 review also found that:

“Generally, calls were delivered to the customer at pace and there was little

opportunity for customers to consider the information or to ask questions. Call

handlers did not always check understanding and did not re-iterate important

messages, for example, shopping around and the implications of taking their

entire pension fund as cash”

4.149. In relation to call handler documentation, the May 2016 review stated:

“We identified that the frameworks need improvement to ensure there is sufficient

and balanced information about products, features and implications, so customers

can make informed decisions about their retirement options. The frameworks also

need to include or expand upon questions (for example in connection with health

for enhanced annuities) for customers so call handlers can use the responses to

provide information to assist customers make informed decisions.”

4.150. In January 2017, a further review by Prudential’s compliance team followed up on

the May 2016 review of customer communications on Prudential’s secondary sales

channel. It reported:

“Following our report in May 2016 there has been an improvement in the […] calls

where customers discuss at-retirement options and evidence that our

recommendations are being embedded […].

However, we identified some instances where call handlers did not completely

follow the framework, did not check sufficiently customer understanding and

completed calls at pace. This may have affected the customer’s ability to be aware

of or to understand at-retirement options and the risks associated with taking

cash at retirement.”

4.151. As a result of these failings, Prudential’s Business Quality team began monitoring

100% of annuity calls across all sales channels from 28 July 2017 onwards with

Prudential’s compliance team conducting periodic checks of that work, which was

further checked by an independent skilled person. The team conducted a review

of customer communications in August 2017.

4.152. The review assessed 38 calls with customers from 27 July 2017, which had been

the subject of first-line monitoring. Of these calls, 23 were identified as being

“significant” annuity conversations. This meant that the key purpose of the call

related to selling an annuity to a customer or making a customer aware of the

options available to them. The review found that on Prudential’s secondary sales

channel, first-line monitoring had failed to identify problems related to enhanced

annuities and the Open Market Option in six out of 13 significant calls.

4.153. For example, in one case a call handler “did not probe further to establish the

relevance or importance of the customer’s response to questions about his or his

wife’s health condition”. In another case, a customer was told “that he was not

eligible for an enhanced annuity with Prudential due to his age and fund value. He

misunderstood this and thought he was unable to have an annuity with Prudential.

At this point the call handler should have re-iterated that he could shop around

for an enhanced annuity with another provider.”

4.154. In this instance the call handler did not make a reasonable effort during the course

of the call to ensure that the customer understood the options available to them.

This was all the more important given that customer misunderstood what they

had been told during the call. By failing to correct the customer’s

misunderstanding and failing to explain the option to shop around for a better

deal on the open market, the call handler undermined the written Open Market

information that had previously been provided to the customer in accordance with

regulatory requirements.

4.155. The review further assessed that in three calls “the call handlers did not confirm

the second life’s health and lifestyle where the first life has provided information

on his/her health only. When no information was provided on the second life’s

health and lifestyle, the call handler should have asked again for information on

the second life”.

4.156. Underlying these problems was the fact that the criteria used by those monitoring

Prudential's secondary sales channel did "not clearly cover all areas” which needed

to be considered.

4.157. In October 2017, a follow-up review of 35 significant calls in respect of the sale

of annuities was conducted by an independent skilled person. The skilled person

concluded that as of 30 September 2017, customers were being provided with

adequate information in relation to enhanced annuities and the Open Market

Option.

Third-line monitoring – Internal Audit

4.158. In November 2016 Prudential’s third-line audit team reviewed oversight of sales

on its secondary sales channel. The report found that quality assurance standards

on its secondary sales channel were less stringent than on its primary channel. In

particular, the report stated that not all calls were being audio recorded and call

monitoring was random rather than “risk-based”.

4.159. In addition, only 1% of calls with customers were being monitored, there was no

targeting of important “at-retirement” conversations and there was no dedicated

quality assurance team. Finally, the risk warnings that Prudential was required to

implement in May 2016 had not been implemented until August 2016.

4.160. A review conducted by Prudential in November 2016 considered the results of the

Authority’s Thematic Review of Annuity Sales Practices (TR 16/7) on Prudential’s

primary sales channel. It reported as follows:

“It was evidenced throughout the Telephony Framework (including Risk Warnings)

that the importance of Shopping around, Health issues (including serious ill health

and lifestyle conditions) are discussed at all relevant interactions with the

Customer. The messages are reiterated where appropriate, this includes at the

beginning, during and at the end of the telephone journey.”

Volume of calls monitored

4.161. During the Relevant Period the volume of telephone conversations between call

handlers and customers that was monitored across Prudential’s sales channels

was inconsistent, and at times very low. This improved during the Relevant Period.

4.162. Between January and October 2009 the percentage of annuity conversations

monitored on Prudential’s primary sales channel averaged 2.8% of calls per

month. Between February 2010 and September 2012 the percentage then

increased to an average of 7.66% of calls per month. This average then fell to

4.26% of calls per month between March 2013 and August 2014. The average

then rose again to 12.53% of calls per month between September 2014 and

October 2016. The average monitoring volume on Prudential’s primary sales

channel across the Relevant Period was approximately 8%.

4.163. The percentage of telephone conversations, which included annuity conversations,

monitored on Prudential’s secondary sales channel from May 2011 to December

2016 averaged 0.58% of all calls per month and did not exceed 1% for any month.

4.164. In December 2013, Prudential sought “an academic perspective on what volume

of monitoring would be deemed as being ‘statistically sufficient’”. This was

provided by an in-house actuarial specialist. It was based on an estimate that

Prudential was conducting 22,000 significant telephone conversations per month

through one of Prudential’s main sales channels. The conclusion was that

monitoring 9.8% of 22,000 calls on that channel each month would result in a

95% confidence level and a 2% margin of error. At that time, Prudential estimated

that it was monitoring approximately 11.4% of calls on that channel, through

monitoring by sales managers and the business quality team.

Response to failures

4.165. Results from Prudential’s first-line call monitoring were reported to Prudential’s

management. Specific failure rates in relation to coverage of enhanced annuities

and the Open Market Option were not reported to management until 2013.

However, even prior to 2013 there are indications of potential problems with the

amount of information being provided to customers about their retirement income

options.

4.166. From July 2008 to August 2008, first-line call monitoring on Prudential’s primary

sales channel reported only the number of annuity calls that had been classed as

breaches. These were not reported as a percentage of annuity calls audited, and

did not specify breaches linked to the provision of information about enhanced

annuities or the Open Market Option. However, accompanying commentary in

August 2008 indicated that a significant proportion of recorded breaches were for

breaching “Clear, Fair and not Misleading Requirements” otherwise known as

“CFNM” requirements.

4.167. Between September and December 2008, first-line call monitoring on Prudential’s

primary sales channel also reported the percentage of overall calls audited that

had been classed as breaches, and the percentage of overall calls audited that

were annuity calls and had been classed as breaches. These included breaches of

“CFNM” requirements. The percentage of calls audited overall that were classed

as “routine breaches” averaged 10.9% during that period and the percentage of

the audited calls which were annuity calls and classed as “routine breaches”

averaged 5.3%. The number of “significant breaches” that were identified during

this period were much lower; it was often the case that one or no “significant

breaches” were identified in a month.

4.168. From January 2009 to October 2009, first-line call monitoring on Prudential’s

primary sales channel reported the percentage of audited annuity calls classed as

breaches. The percentage of audited annuity calls containing breaches averaged

9.86% over that period. Commentary accompanying the results noted that

breaches were often being caused by call handlers not supplying customers with

adequate information about their annuity options. Again, the number of

“significant breaches” that were identified during this period was much lower.

4.169. Results for April 2012 revealed ten errors relating to how call handlers dealt with

the Enhancement Process (Cat A – 4, Cat B – 5, Cat C – 6) and listed it as one of

three top compliance trends, with the following notes:

“Enhancement Process (10)

Increase on last month (4 to 10)

There has [sic] been no changes made to how enhancements are discussed with

the customer. Examples of errors include:

Not explaining to customer why we are asking about their health i.e. higher

income & just asking “are you in a good health?”

Not responding to a comment made by the customer that would suggest

there was a lifestyle or previous condition

2 were in respect to process errors for not updating all the correct systems

meaning risk customer could return and NBS would set-up the annuity

without knowing there could be an enhancement.

1 Cat A error was for simply not covering enhancement at all”

4.170. Prudential introduced a new system for monitoring calls in 2013. Prudential began

reporting specific failure rates in relation to the requirements of the ABI Code,

including in relation to health enhancement and the Open Market Option. At that

time, the “risk tolerance” for detected “customer outcome” fails on Prudential’s

primary sales channel was set at 15%. The “risk tolerance” for “changed customer

outcome” fails at that time was 2%. When such reporting was introduced in 2013,

problems with call handlers inadequately dealing with enhanced annuities

immediately surfaced.

4.171. Results in March 2013 returned an amber rating for ABI Declaration fails, based

on 129 of 140 calls passing, and a red rating for customer outcome fails based on

97 of 140 calls passing. Commentary accompanying the report stated:

“No clear themes as to the root cause was [sic] identified and there is no evidence

of systemic failure of adherence to process, call scripts or compliance.”

4.172. Results in April 2013 reported that Business Quality (BQ) had:

“identified a couple of occurrences where declaration points were not covered in

full and also a couple of occasions where the spouse’s health had not been fully

explored. However, overall BQ have not observed any systemic issues regarding

discussing the ABI declaration points.”

4.173. Failures observed in relation to the assessment for enhancement were again

described as not involving “any systemic failure” in July 2013, but adherence to

the health process was said to require improvement.

4.174. Failures in relation to covering the key questions from the ABI Code, which

included enhanced annuities, were again described as not material in December

2013.

4.175. Results in March 2014 reported that “[w]hilst still within appetite, there has been

an increase in the number of calls where the health assessment or fund

consolidation discussion has been inaccurate and not fully in accordance with the

code.” 4 out of 105 calls audited in that month failed the “customer outcome”

score, and the report noted that “3 of the 4 ‘Health’ fails are in respect to missing

a potential eligible condition for the 2nd life being added to the annuity.”

4.176. Results in August 2014 reported that:

“The main source of outcome fails continue to be 'ABI' related, however there has

been an improvement on last month. Health continues to be the main failure point

and accounts for 2/3rds of the Outcome fails associated to an ABI related point.

However, it is important to note that whilst 'health' is the most common fail

reason, the health process is complex and in context of all calls reviewed, there

is still a 96% overall customer outcome pass rate on health specifically.

Overall, a positive month, with results back above threshold and no evidence of

any systemic failure or material concerns.”

4.177. These results were discussed in a monthly “Training and Competence

Governance” meeting in August 2014 which noted that “[a]lthough specific trends

identified per standard, for ABI Health, […] general root cause is consultant

listening and then questioning skills in reaction to customer information provided.”

Action agreed in response was “to ensure that health questioning is detailed within

[call handler] weekly update”.

4.178. Results in January 2015 reported a “significant increase in calls with issues related

to the Health process. 12 in January, equating to overall 90% pass rate, compared

to 5 in December. 10 of the errors were from experienced consultants.” The

Business Quality report also noted that “[e]rrors in relation to OMO continues to

be a recurring common trend” in January 2015.”

4.179. This was then discussed at a monthly “Training and Competence Governance”

meeting in February 2015 which noted that “ABI – 19% (6/31) of all failed calls

included ‘ABI Health’ [...] Health overall quality result remained above target at

96%, three of the 6 health fails was due to not referring customer (or spouse) for

underwriting where condition disclosed was either on enhanced list or not

featured, either scenario should result in a health referral”.

4.180. The April 2015 results showed that 330 out of the 349 calls assessed passed the

customer outcome. The results were annotated with “Customer outcome trends”

including:

“The main fail point observed was where the consultant did not fully ascertain a

customer’s health status in order to determine whether there was potential for

higher income, examples included not checking if customer smoked and not

checking for any past conditions. Although this was the highest fail reason, it is

important to understand that overall the customer outcome pass rate specific to

the health aspect, was 98% so there are no systemic concerns.”

and

“The 4 missed OMO messages was [sic] either in respect to customers looking to

add on another dependant or where customer has an ineligible health condition.

Potentially meaning a customer could miss out on an option or higher income

through not shopping around.”

4.181. In June 2015, a specific fail point was identified in respect of call handlers

informing customers of their right to shop around upon being informed that they

would not qualify for enhancement with Prudential. These detected trends were

communicated to call handlers in May 2015 and June 2015 along with further

guidance to address health and OMO fails. In August 2015, Business Quality noted

in relation to the Open Market Option that “There is no indication of any systemic

failings and errors/omissions tend to be isolated in nature”. One way of addressing

failings in the primary sales channel during 2015 was for a manager to work with

a call handler on a 1-2-1 basis in order to address specific issues such as an

explanation of the customer’s ability to shop around for an enhanced annuity on

the open market.

4.182. In March 2016, the position was reported in the following terms: “The quality on

fully informing customers on the importance and benefits of shopping around

continues to remain fairly static at 93%. Errors are largely non-material in nature

where consultant has not reinforced the shopping around message.” However, a

specifically noted problem was the failure to inform customers of their option to

shop around “at the point of delivering the enhanced decision”.

4.183. Finally, in October 2016, Business Quality considered that while the Open Market

Option results had improved compared to the previous month, it remained a

recurring point of failure.

5.
FAILINGS

5.1.
The statutory and regulatory provisions and guidance relevant to this Notice are

referred to in Annex A.

5.2.
Based on the facts and matters above, the Authority finds that Prudential

breached Principles 3 and 6.

5.3.
Prudential breached Principle 3 during the Relevant Period by failing to take

reasonable care to organise and control its affairs responsibly and effectively, with

adequate risk management systems in respect of complex products for which the

ordinary customer’s need for accurate information is high. These failings in turn

meant that some customers were not treated fairly and that information was not

communicated to them in a way which was clear, fair and not misleading. This

was particularly so in the context of non-advised sales, where the customer chose

their annuity product based on factual information provided by a call handler.

5.4.
Prudential failed to put in place sufficient controls to mitigate the risk to the

interests of its customers and in particular to ensure that its existing customers

purchasing pension annuities on a non-advised basis were provided with

appropriate and timely information in relation to enhanced annuities and the

option to shop around for an annuity on the open market. This included the

potential impact on the customer’s retirement income.

5.5.
In particular:

(1)
Prudential approved and employed call handler documentation for use in

telephone conversations with customers which:

a)
Failed to direct call handlers to provide customers with appropriate and

timely information about which medical conditions and lifestyle factors

could make them eligible for an enhanced annuity. This created a

significant risk that relevant and important information in relation to

eligibility for an enhanced annuity, including the right to shop around,

might not be provided, and that customers might be discouraged from

shopping around for a better deal on the open market;

b)
Failed to direct call handlers to inform customers of the possibility that

different providers may apply different eligibility criteria for enhanced

annuities;

c)
Failed to direct call handlers to inform customers of the possibility that

different providers may pay more (or less) income under an enhanced

annuity;

d)
Failed to direct call handlers to inform customers of their option to

shop around for an annuity or an enhanced annuity on the open

market;

e)
Failed to direct call handlers to explain to customers that by shopping

around for an annuity or an enhanced annuity on the open market the

customer could obtain a higher income for life; and/or

f)
Prompted call handlers to make statements before or after referring to

the customer’s right to shop around for an annuity which may have

discouraged the customer from shopping around and therefore

potentially undermined the written information that had previously

been provided in accordance with regulatory requirements.

(2)
Prudential’s monitoring regime was inadequate because it failed:

a)
To consistently monitor a sufficient number of calls with customers

across the entirety of the Relevant Period;

b)
To apply sufficiently stringent criteria to the calls monitored;

c)
To follow up adequately when problems were identified in relation to

the communication of information to customers regarding Enhanced

Annuities and the Open Market Option.

5.6.
The Authority considers that these amount to serious failings, which have either

resulted in, or created a significant risk of, poor customer outcomes and consumer

detriment, including that customers have not been treated fairly.

5.7.
Prudential breached Principle 6 during the Relevant Period by failing to pay due

regard to the interests of its customers and treat them fairly.

5.8.
In particular:

(1)
Prudential’s call handler documentation meant that call handlers failed to

provide some customers with appropriate and timely information,

particularly in relation to the Open Market Option and their eligibility for an

enhanced annuity. As a consequence, some customers were either

discouraged from shopping around on the open market for a better deal on

an annuity or an enhanced annuity, or not made aware that doing so could

achieve a better rate.

5.9.
The Authority has taken into account the significant redress payments made to

those customers affected by its failings.

5.10.
Having regard to the issues above, the Authority considers that it is appropriate

and proportionate in all the circumstances to take disciplinary action against

Prudential for its Principle breaches during the Relevant Period.

6.
SANCTION

6.1.
The Authority has considered the disciplinary and other options available to it and

has concluded that a financial penalty is the appropriate sanction in the

circumstances of this particular case.

6.2.
The Authority’s policy on the imposition of financial penalties is set out in Chapter

6 of DEPP. In determining the financial penalty, the Authority has had regard to

this guidance. Changes to the penalty policy set out in DEPP were introduced on

6 March 2010. As set out at paragraph 2.7 of the Authority’s Policy Statement

10/4, when calculating a financial penalty where the conduct straddles penalty

regimes, the Authority must have regard to both the penalty regime which was

effective before 6 March 2010 (the “old penalty regime”) and the penalty regime

which was effective after 6 March 2010 (the “current penalty regime”).

6.3.
The Authority has therefore:

(1)
calculated the financial penalty for Prudential’s misconduct from 1 July 2008

to 5 March 2010 by applying the old penalty regime to this misconduct;

(2)
calculated the financial penalty for Prudential’s misconduct from 6 March

2010 to 30 September 2017 by applying the current penalty regime to this

misconduct; and

(3)
added the penalties calculated under (1) and (2) to produce the total

financial penalty.

Financial penalty under the old penalty regime

6.4.
All references to DEPP under this heading are to the version of DEPP in force prior

to 6 March 2010.

6.5.
In determining what financial penalty is appropriate and proportionate to the

breaches, the Authority is required to consider all the relevant circumstances of

the case. DEPP 6.5.2G identifies a non-exhaustive list of factors that may be

relevant to determining the level of financial penalty. The Authority has had regard

to the following:

Deterrence (DEPP 6.5.2G(1))

6.6.
The principal purpose of a financial penalty is to promote high standards of

regulatory conduct by deterring firms who have committed breaches from

committing further breaches and helping to deter other firms from committing

similar breaches, as well as demonstrating generally the benefits of compliant

business.

Nature, seriousness and impact of the breaches (DEPP 6.5.2G(2))

6.7.
The Authority has had regard to the seriousness of the breaches, including the

nature of the requirements breached and the duration and frequency of the

breaches. The Authority considers that the breaches reveal serious weaknesses

in the management systems and controls relating to the relevant business area

which created a risk of loss to consumers. For the reasons set out in this Notice,

the Authority considers that the breaches are of a serious nature.

Extent to which the breaches were deliberate or reckless (DEPP

6.8.
The Authority does not consider Prudential’s failings were deliberate or reckless.

Size, financial resources and other circumstances of the firm (DEPP

6.9.
In deciding on the level of penalty, the Authority has had regard to the size of the

financial resources of Prudential.

6.10.
The Authority has no evidence to suggest that Prudential is unable to pay the

financial penalty.

The amount of benefit gained or loss avoided (DEPP 6.5.2G(6))

6.11.
The Authority has not identified any financial benefit gained or loss avoided,

directly or indirectly from the breaches.

Conduct following the breaches (DEPP 6.5.2G(8))

6.12.
Prudential is conducting a comprehensive redress exercise to compensate

customers directly affected as a result of the breaches.

Disciplinary record and compliance history (DEPP 6.5.2G(9))

6.13.
The Authority has had regard to the fact that Prudential had not been the subject

of previous disciplinary action as at 5 March 2010.

Conclusions in relation to old penalty regime

6.14.
The Authority therefore imposes a financial penalty under the old penalty regime

of £4,000,000.

6.15.
The Authority and Prudential reached agreement at Stage 1 and so a 30%

discount applies. Therefore, the penalty for the misconduct under the old penalty

regime is £2,800,000.

Financial penalty under the current penalty regime

6.16.
In respect of conduct occurring on or after 6 March 2010, the Authority applies a

five-step framework to determine the appropriate level of financial penalty. DEPP

6.5A sets out the details of the five-step framework that applies in respect of

financial penalties imposed on firms.

Step 1: disgorgement

6.17.
Pursuant to DEPP 6.5A.1G, at Step 1 the Authority seeks to deprive a firm of the

financial benefit derived directly from the breaches where it is practicable to

quantify this.

6.18.
The Authority has not identified any financial benefit that Prudential derived

directly from its breaches.

6.19.
Step 1 is therefore £0.

Step 2: the seriousness of the breaches

6.20.
Pursuant to DEPP 6.5A.2G, at Step 2 the Authority determines a figure that

reflects the seriousness of the breach. Where the amount of revenue generated

by a firm from a particular product line or business area is indicative of the harm

or potential harm that its breach may cause, that figure will be based on a

percentage of the firm’s revenue from the relevant products or business area.

6.21.
The Authority considers that the revenue generated by Prudential is indicative of

the harm or potential harm caused by its breaches. The Authority has therefore

determined a figure based on a percentage of Prudential’s relevant revenue.

Prudential’s relevant revenue is the revenue derived by the firm during the period

of the breach from the products to which the breach relates. Under the current

regime, the period of Prudential’s breaches was from 6 March 2010 to 30

September 2017. The Authority considers Prudential’s relevant revenue for this

period to be £6,021,453,333.

6.22.
In deciding on the percentage of the relevant revenue that forms the basis of the

Step 2 figure, the Authority considers the seriousness of the breach and chooses

a percentage between 0% and 20%. This range is divided into five fixed levels

which represent, on a sliding scale, the seriousness of the breach; the more

serious the breach, the higher the level. For penalties imposed on firms there are

the following five levels:

Level 1 – 0%;

Level 2 – 5%;

Level 3 – 10%;

Level 4 – 15%; and

Level 5 – 20%.

6.23.
In assessing the seriousness of a breach to determine which level is most

appropriate to the case, the Authority takes into account various factors that

reflect the impact and nature of the breach and considers whether the firm

committed the breach deliberately or recklessly. DEPP 6.5A.2G(11) lists factors

likely to be considered “level 4 or 5 factors.” Of these, the Authority considers the

following factors are particularly relevant to this case:

(1)
Prudential’s breaches caused a significant risk of loss to individual

consumers. Although the loss to each consumer may not have been

“significant” in each case, the aggregate sums offered to approximately

17,240 customers by way of redress are significant.

(2)
The weaknesses in Prudential’s management systems and internal controls

were serious in respect of its sales process documentation, remuneration

and incentive schemes and monitoring processes relating to Prudential’s

sales of non-advised annuities.

(3)
Prudential’s customers are potentially vulnerable, being at or nearing

retirement age, a proportion of whom might have been be eligible for

enhanced annuities due to poor health.

6.24.
DEPP 6.5A.2G(12) lists factors likely to be considered ”level 1, 2 or 3 factors”. Of

these, the Authority considers the following factors to be relevant:

(1)
The breaches were committed negligently;

(2)
There is no evidence of any attempt by Prudential’s senior management to

conceal the misconduct; and

(3)
The impact of the breaches, resulting in consumers suffering losses, is in

the process of being addressed through a significant redress exercise.

6.25.
Taking all of these factors into account, the Authority considers the seriousness

of the breach to be Level 3 and so the Step 2 figure is 10% of £6,021,453,333.

6.26.
Step 2 is therefore £602,145,333.

6.27.
DEPP6.5.3(3)G provides that the Authority may decrease the level of penalty

arrived at after applying Step 2 of the framework if it considers that the penalty

is disproportionately high for the breaches concerned. Taking all these factors into

account, the Step 2 figure is £30,107,267.

Step 3: mitigating and aggravating factors

6.28.
Pursuant to DEPP 6.5A.3G, at Step 3 the Authority may increase or decrease the

amount of the financial penalty arrived at after Step 2, but not including any

amount to be disgorged as set out in Step 1, to take into account factors which

aggravate or mitigate the breach.

6.29.
The Authority considers that the following factors aggravate the breaches:

(1)
Previous disciplinary record:

a)
Prudential was fined a total of £16 million on 27 March 2013 for failing to

deal with the FSA in an open and co-operative way and by failing to

disclose appropriately information of which the FSA would reasonably

expect notice (breach of Principle 11).

b)
In a linked case, Prudential’s parent company was fined £14 million on

27 March 2013 for failing to inform the UKLA of a proposed acquisition

which resulted in a significant risk that the wrong regulatory decision

would be made (breach of Listing Principle 6).

6.30.
The Authority considers that the following factors mitigate the breaches:

(1)
Prudential is conducting a comprehensive redress exercise voluntarily and

has contacted over 83% of the customer population since the

commencement of the exercise in April 2018.

6.31.
Having taken into account these aggravating and mitigating factors, the Authority

considers that no adjustment should be made to the figure at Step 2 because the

percentages applied cancel each other out.

6.32.
Step 3 is therefore £30,107,267.

Step 4: adjustment for deterrence

6.33.
Pursuant to DEPP 6.5A.4G, if the Authority considers the figure arrived at after

Step 3 is insufficient to deter the firm who committed the breach, or others, from

committing further or similar breaches, then the Authority may increase the

penalty.

6.34.
The Authority considers that the Step 3 figure of £30,107,267 does not require

an adjustment for deterrence.

6.35.
Step 4 is therefore £30,107,267.

Step 5: settlement discount

6.36.
Pursuant to DEPP 6.5A.5G, if the Authority and the firm on which a penalty is to

be imposed agree the amount of the financial penalty and other terms, DEPP 6.7

provides that the amount of the financial penalty which might otherwise have

been payable will be reduced to reflect the stage at which the Authority and the

firm reached agreement.

6.37.
The Authority and Prudential reached agreement at Stage 1 and so a 30%

discount applies to the Step 4 figure.

6.38.
The Step 5 figure will therefore be £21,075,000 (rounded down to the nearest

6.39.
The Authority hereby imposes a total financial penalty of £23,875,000

(£34,107,200 before Stage 1 discount) on Prudential for breaching Principle 3 and

Principle 6.

7.
PROCEDURAL MATTERS

7.1.
This Notice is given to Prudential under section 390 of the Act.

Decision maker

7.2.
The decision which gave rise to the obligation to give this Notice was made by the

Settlement Decision Makers.

Manner and time for payment

7.3.
The financial penalty must be paid in full by Prudential to the Authority no later

than 14 October 2019.

If the financial penalty is not paid

7.4.
If all or any of the financial penalty is outstanding on 14 October 2019, the

Authority may recover the outstanding amount as a debt owed by Prudential and

due to the Authority.

7.5.
Sections 391(4),391(6) and 391(7) of the Act apply to the publication of

information about the matter to which this Notice relates. Under those provisions,

the Authority must publish such information about the matter to which this Notice

relates as the Authority considers appropriate. The information may be published

in such manner as the Authority considers appropriate. However, the Authority

may not publish information if such publication would, in the opinion of the

Authority, be unfair to you or prejudicial to the interests of consumers or

detrimental to the stability of the UK financial system.

Authority contacts

7.6.
For
more
information
concerning
this
matter
generally,
contact

Dharmesh Gadhavi at the Authority (direct line: 020 7066 5790 / email:

dharmesh.gadhavi@fca.org.uk).

Head of Department, for and on behalf of the Authority

Financial Conduct Authority, Enforcement and Market Oversight Division


ANNEX A

1.
RELEVANT STATUTORY PROVISIONS

1.1.
The Authority’s statutory objectives, set out in section 1B(3) of the Act, include

the consumer protection objective.

1.2.
Section 206(1) of the Act provides:

“If the Authority considers that an authorised person has contravened a

requirement imposed on him by or under this Act… it may impose on him a

penalty, in respect of the contravention, of such amount as it considers

appropriate.”

2.
RELEVANT REGULATORY PROVISIONS

Principles for Businesses

2.1.
The Principles are a general statement of the fundamental obligations of firms

under the regulatory system and are set out in the Authority’s Handbook. They

derive their authority from the Authority’s rule-making powers set out in the Act.

The relevant Principles are as follows.

2.2.
Principle 3 (Management and Control) provides:

“A firm must take reasonable care to organise and control its affairs responsibly

and effectively, with adequate risk management systems”.

2.3.
Principle 6 (Customers’ Interests) provides:

“A firm must pay due regard to the interests of its customers and treat them

fairly.”

Conduct of Business Sourcebook (COBS)

2.4.
The relevant law and regulatory standards applicable to the sale of annuities are

contained in the Authority’s Principles for Business, and in the COBS section of

the Authority’s Handbook.

2.5.
Throughout the Relevant Period, Prudential had an obligation to comply with the

following COBS rules in respect of all communications with its customers:

(1)
COBS 2.1.1R requires firms to act honestly, fairly and professionally in

accordance with the best interests of its clients;

(2)
COBS 4.2.1R requires firms to take reasonable steps to ensure that a

communication is fair, clear and not misleading. COBS 4.2.2G explains that

the fair, clear and not misleading rule requires a firm to take into account

the information being conveyed in the communication as well as the

intended recipient. In addition, the requirement on firms imposed by COBS

4.2.1R is not simply to take reasonable steps not to mislead customers;

firms must, over and above this, take reasonable steps to ensure that the

communication is fair and clear; and

(3)
COBS 19.4 sets out the information a firm must provide to a customer to

enable them to make an informed decision about their options for accessing

their pensions savings on retirement, including information on the Open

Market Option.

2.6.
The stated rules under COBS 19.4 have been amended at various points over the

Relevant Period, including on 6 April 2015 and 10 October 2016 to reflect the fact

that consumers had more options at retirement because of the Pensions Freedoms

changes. However, Parliament had considered the issue in March 2002 and noted

that the regulation governing the Open Market Option statement was “designed

to ensure that consumers are made aware of their right to shop around to get the

best annuity deal on offer to suit their circumstances”. Similarly, the Authority

noted in Policy Statement 16/12 that the amendments to COBS 19.4 were

designed to “effectively restate our existing expectations on firms…to add

guidance to COBS 19.4 to assist firms in complying with the client’s best interests

rule (COBS 2.1.1R) and the fair, clear and not misleading rule (COBS 4.2.1.R)”.

ANNEX B

PRESCRIBED CONTENT OF WRITTEN PACKS

From the start of the Relevant Period until 6 April 2015, firms could comply with

the requirement to include an ‘Open Market Options Statement’ under COBS 19.4

in one of two ways.

The first option was to include an informational brochure produced by the

Authority called ‘Your pension: it's time to choose’, (the ‘standard brochure’) along

with “a written summary of the retail client's open market option, which is

sufficient for the client to be able to make an informed decision about whether to

exercise, or to decline to exercise, an open market option.” In practice this

“written summary” was usually a cover letter, in which the firm was expected to

re-iterate the message about shopping around and highlight any related points

that were specific to the customer.

The second option was to provide “a written statement that gives materially the

same information.” In practice, this meant a bespoke brochure produced by the

firm, which could include specific information about the firm’s annuity products

alongside the key information from the ‘standard brochure’.

Prior to the start of the Relevant Period, when the rule was introduced in 2002, it

specified that any bespoke brochure was required to include “an explanation of:

(a) the open market option (including the fact that companies offer different

annuity rates and different types of annuity, and that the scheme member

or policyholder may get a better deal by shopping around);

(b) the financial advantages and disadvantages in general terms of making

use of this option when compared with taking a pension annuity with that

firm;

(c) how the scheme member or policyholder may make use of the open

market option should he decide to do so; and

(d) the advisability of taking professional advice.”

However, during the Relevant Period, the information required to be provided was

specified only by reference to the standard brochure. The format and content of

the standard brochure changed over the course of the Relevant Period. However,

it was generally the equivalent of 12-24 A4 pages in length.

With regards to Enhanced Annuities, the standard brochure included an

explanation of how they could benefit someone eligible for them. It reminded the

customer, usually in about 6 places, to consider their own eligibility for an

Enhanced Annuity. The brochure included lifestyle factors such as being

overweight or smoking as potential reasons for Enhancement. For example:

Enhanced and impaired-life annuities

Some companies offer impaired-life annuities that pay a higher than normal

income if you have health problems that threaten to reduce your lifespan. You

might be able to get an enhanced annuity if you are overweight or smoke

regularly. Some companies offer higher rates to people who have followed certain

occupations or people who live in certain parts of the country.

Always check whether you may be eligible for either of these options.

With regards to the Open Market Option, the standard brochure included an

explanation of the customer’s right to buy an Annuity on the open market, and a

dedicated section on why and how to shop around. In total, the brochure made

15 – 25 references to shopping around. It often linked shopping around to the

customer’s eligibility for an Enhanced Annuity, encouraging the customer to

consider enhancement when shopping around. For example:

Research by the Financial Conduct Authority in February 2014 showed that eight

out of ten people who bought an annuity from their existing pension provider

would have received a higher retirement income by shopping around. And don’t

forget to check whether you would be eligible for a higher income based on your

health or lifestyle.

In April 2015, the Rule was changed substantially. New requirements were added

to the prescribed information, as set out in the text of the Rule.

INDUSTRY STANDARDS

As a member of the Association of British Insurers (the ‘ABI’), Prudential was

expected to follow its guidance on best practice in relation to Annuity sales.

The ABI’s “Good Practice Guide: Improving customers’ retirement experiences”

was published in July 2008. It repeatedly stressed the importance of providing

adequate information to customers in relation to Enhanced Annuities and the

Open Market Option.

i)
Under a heading marked ‘Principle’, it encouraged providers to “[d]raw the

customer’s attention to product features and terms and conditions that may

significantly affect benefits.”

ii)
Under ‘Good Practice’ in relation to this principle the guidance states that

“[i]n quoting all available options draw the customer’s attention in good time

to particular options that may be to their advantage.”

iii)
Finally, under possible approaches for this same principle, the guidance

states, that “Regardless of whether the information is provided to the

customer or IFA, draw attention to options, for example: − the Open Market

Option”.

iv)
It also lists “Enhanced/impaired” as an Annuity option to be explained to the

customer.

v)
It advises insurers to cover both topics in their wake-up packs and follow-

up packs.

The Good Practice Guide also provides a template cover letter for insurers to use

in their packs which included the following headline message, which had to be

prominently displayed in exact wording at the top of the letter:

i) “Please read this letter carefully. By shopping around you may improve the

income you receive in retirement.”

In the body of the cover letters, insurers were encouraged to use or adapt the

suggested wording to be used to cover Enhanced Annuities and the Open Market

Option.

The suggested wording in relation to Enhanced Annuities was:

Do you have a recognised medical condition? Are you a smoker?

If so, you may be able to buy an annuity that pays more because of these

factors. They are known as ‘enhanced’ or ‘impaired’ annuities

The suggested wording in relation to the Open Market Option was:

Shopping around – buying an annuity

An annuity is a retirement income product whereby you use some or all of the

money in your pension fund to provide you with an annual income in retirement.

It is the most popular way in which people ensure they have enough to live on

for the rest of their lives. If you have built up several pension funds with

separate pension companies, you can usually combine them when buying an

annuity.

You do not have to buy an annuity from us. The Open Market Option (OMO) is

your right to compare what we can offer you with what other pension companies

can provide. If you move to another provider you might get a higher income.

This is not always the case, but it is always worth checking before you buy.

Once you know what type of annuity interests you, you can then compare the

varying levels of income offered by other pension companies. A financial adviser

can help you with this.

You can also use the Financial Services Authority’s free online annuity tables -

www.fsa.gov.uk/tables. See page 8 of the attached booklet for more details.

The guide also encouragers insurers to ensure that the cover letter sent in the

wake-up pack to the customer “inform[s] the customer that a better alternative

to their own product(s) may be available under the Open Market Option”.

In January 2011, the ABI published a ‘Best Practice Guide for the Retirement

Process’. The guide was intended to “help pension providers ensure their

communications approaching retirement help customers to make the necessary

decisions about their retirement income, and encourage shopping around for the

most appropriate and competitive retirement income product.” It expanded on the

principles and rules set down in the 2008 Good Practice Guide.

Its guidance included that ‘Providers should encourage the customer to shop

around for the most appropriate and competitive retirement income product’. In

relation to both Wake-up packs and Follow-up packs, these should:

•
“prominently highlight the benefits of shopping around and that different

providers might offer a higher level of retirement income

•
explain the range of annuity options and products available and their impact on

retirement income, including the possibility of medical conditions or lifestyle

choices leading to a higher level of retirement income through an enhanced

annuity

•
highlight that the provider might not offer the annuity options or product that

best meets the customer’s needs

•
encourage the customer to seek further advice and information about how to

shop around (see useful links)

•
explain to the customers how to shop around (see useful links)”

It also contained template material which required providers to include in cover

letters the following mandatory, prominent wording:

Please read this letter. This letter contains important information on how to

make the most of your pension savings. It’s in your interest to read this letter

and shop around - you may improve the income you receive in retirement.

Do you have a recognised medical condition? Are you a smoker?

If so, you may be able to buy an annuity that pays more because of this. These

options are known as an ‘enhanced’ or ‘impaired’ annuity.

In September 2011, the ABI announced its intention to introduce a mandatory

Code of Conduct on Retirement Choices (the ‘ABI Code’). A consultation document

and draft version of the ABI Code was published in December 2011 and the final

version of the ABI Code was published in March 2012. It came into force in March

2013. The aim of the ABI Code was to reduce the proportion of people who “do

not shop around for an annuity when they reach retirement and, as a result, may

be missing out on a higher income, potentially losing thousands of pounds over

the course of their retirement.”

The ABI Code applied “in addition to any legislative or regulatory requirements

that may also be relevant.” It codified and extended existing industry standards

of good practice. The ABI Code applied “wherever an ABI member is

communicating directly with a new or existing customer who can buy a lifetime

annuity.”

The ABI Code is a mixture of general principles and obligations and specific rules

about communications and the sales process. In terms of general principles and

obligations, the ABI Code states that:

i) “The primary purpose of all customer communications is to help the customer

understand the decisions he or she must make, and to support him or her

through the retirement process”;

ii) “The provider must highlight the possibility of joint, escalating and enhanced

annuities”; and

iii) “The provider must encourage the customer to gather comparative quotations

from different providers. In order to do this, the provider must clearly explain

how this can be done, provide all the information needed and must not sell any

product by relying on the customer’s inertia or ignorance.”

In terms of specific rules, the ABI Code:

i) Introduced or added to requirements for members’ written communications

(1) Required greater contact with customers in the years prior to their

anticipated retirement;

(2) Added to the required content of wake-up packs and follow-up packs;

(3) Gave greater prominence and clarity to the customer’s options, including to

shop around or seek an Enhanced Annuity.

ii) Prohibited members’ wake-up packs and follow-up packs from:

(1) Allowing a customer to purchase an annuity from the provider without first

contacting that provider;

(2) Including an annuity application form unless specifically requested by the

customer.

iii) Required any unrequested quotations included in members’ wake-up packs or

follow-up packs:

(1) To “clearly and prominently state that the customer may be able to obtain

a higher rate by shopping around”; and

(2) To include a prominent reference to the option of seeking an Enhanced

Annuity if no enhanced rate is included with the quote.

iv) Introduced a mandatory process that providers had to complete before being

able to complete any sale. This process included:

(1) Obtaining responses from the customer (orally, digitally or in writing) to 5

key questions, one of which was whether “they have any lifestyle or medical

conditions that may mean they are eligible for an enhanced annuity”;

(2) Explaining any risks that arise from the customer’s responses to these

questions;

(3) Highlighting to the customer the benefits of shopping around;

(4) Sending the customer a ‘personalised illustration’ based on their responses;

(5) Allowing the customer to make an annuity purchase.

ANNEX D

REGULATORY GUIDANCE

1.
During the Relevant Period, the Authority made several interventions emphasising

or clarifying aspects of the regulatory regime, as did the Pensions Regulator,

which has some analogous responsibilities.

THE AUTHORITY

2.
The Authority’s Financial Risk Outlook 2008 included the following warning:

The decline in traditional retirement savings and competition from alternative

suppliers such as fund supermarkets and wrap providers, and other alternative

methods of providing a retirement income, pose a threat to the levels of new and

existing business for life insurers. This is a particular challenge for firms with

shrinking with-profits funds, where pressures to reduce costs may affect

standards of customer service. Insurers seeking alternative sources of new

business, while continuing to manage their existing business, need to ensure they

do so in a way that treats their existing customers fairly.

3.
In 2008 the Authority published a statement titled ‘Results of the FSA's thematic

work on Open Market Options under maturing personal pension and stakeholder

pension schemes’. In the statement, the FSA listed examples of poor practice

related to Enhanced Annuities and the Open Market Option that it had uncovered

as part of its research:

i)
Not explaining the advantages of exercising the OMO.

Several firms stopped short of actually explaining that exercising an OMO

can result in a higher pension. Other firms explained the OMO as where 'you

can get another firm to pay the pension' which in itself does not suggest any

advantage to the customer. To comply with our rules, and with Principles 6

and 7, firms' literature should include a clear message that exercising the

open market option might result in a higher pension and is therefore worth

investigating. The wording firms use should also have regard to the realistic

possibility of whether their customer base is likely to be able to shop around,

for example most firms impose minimum fund sizes for taking OMO business

of say £10,000 or £20,000.

Very few firms mentioned the advantages of shopping around for customers

with health problems, who could be better off buying an annuity from

providers offering impaired life or enhanced rate annuities.

ii)
Prominence of information.

Generally, the OMO itself was given sufficient prominence in firms’ material,

but in some cases it was hardly mentioned or left until late in the wake up

letter, with the main focus on the firm’s own annuity products. Care needs

to be exercised to ensure that the OMO is given proper prominence and that

there is an appropriate balance between the information provided on the

OMO and on the firm's own annuity products.

iii)
Mixing up the best type of annuity with the best rate.

Too many companies blurred these issues into one, to make statements

such as 'no one insurance company can provide all different types of annuity

and there is no best type that suits all'. Another firm said 'there is no such

thing as the best rate'. Both these statements are misleading. There are

different types of annuity and while no one type will suit all, once a

policyholder has decided on the right 'type' for them, there are different

rates available. Firms' literature should make it clear that policyholders have

the option of shopping around and that by doing so they could get a better

rate.

4.
It also listed examples of best practice, including:

i)
Option of buying an annuity from the existing provider or shopping around

using the OMO for a higher income, making it clear that other firms may

offer better annuity rates.

5.
In February 2014, the Authority published a review called “Pension Annuities: A

review of consumer behaviour.” Its purpose was to review the available literature

on consumer behaviour and outcomes in relation to annuities. It was mostly based

on consumer research from before the ABI Code. The review fed into the

Authority’s subsequent thematic report. Although not always the case, the review

suggested that in many cases not shopping around was problematic and was

leading to poor outcomes for customers.

6.
In February 2014, the Authority published the report of a thematic review -

“TR14/2: Thematic Review of Annuities”. The review estimated “that overall 80%

of those purchasing an annuity from their existing pension provider would benefit

from shopping around and switching.” It also raised a concern that “[c]onsumer

inertia plays a significant role and some providers may be benefitting from this

through the expected profitability of the annuities they sell to their existing

customers.”

7.
The review also signalled that the Authority intended to conduct further work in

the area of annuity sales practices, both in terms of how the market itself

operates, and what information firms provide to their existing customers. It

We would be concerned if insurers used sales techniques that were designed to

retain customers by putting them off shopping around. The supervisory element

of the market study will look in detail at a sample of pension providers’ selling

practices, including any retention strategies they may have, which will consider

whether the best interests of customers are appropriately prioritised within these

strategies.

OTHER GUIDANCE

8.
The Pensions Regulator regulates work-based schemes, so its guidance did not

apply to Relevant Sales. However, the issues it deals with are analogous and it is

therefore illustrative of what was regarded as good practice for dealing with

customers approaching retirement.

9.
In October 2009, the Pensions Regulator released a substantial report on the

provision of information to customers approaching retirement who are part of a

trust-based pension scheme. It identified examples of good practice that included:

(1)
“Explaining the OMO in a clear, fair and positive manner, making clear the

potential benefits of investigating the OMO”; and

(2)
“Simple health lifestyle screening questions that may lead to full
questionnaire”.

10.
In November 2010, the Pensions Regulator released its own informational

brochure for work-based scheme members. This, like the Authority’s factsheet,

dealt with the Open Market Option clearly and prominently. It included the

following advice:

It is particularly important to shop around:

• to find out if the annuity offered by your scheme is competitive;

• if you are in poor health as this may mean you can get a higher annuity; and

• if your lifestyle may qualify you for a higher annuity, for example, if you smoke

or do a particular type of job.

11.
It also stated:

Even if you have been very happy with your pension scheme up to now, consider

the open-market option to check that it is offering the best deal for you when you

come to retire. Remember, if you do nothing, you may not get the best annuity