Consultation outcome

Consultation: creating a secondary market for annuities – secondary legislation

Updated 31 July 2018

1. Introduction

In the March Budget 2015, the government announced its intentions to create a secondary market for consumers to sell their annuity incomes in exchange for a lump sum. The government’s proposals will, in effect, extend the Pensions Freedoms and Flexibilities to people who retired prior to April 2015 and had little choice but to buy an annuity with their defined contribution pension pots.

The government published a consultation in March 2015 on the proposed policy framework around the future secondary market for annuities. This consultation closed in June, and in December the government published its response.

In that document the government summarised the responses received, and outlined its intention to further implement the market by:

• consulting on the details of the tax framework for sellers and buyers in Spring 2016
• introducing secondary legislation to amend the Regulated Activities Order (RAO) ^{[footnote 1]} and associated secondary legislation under the Financial Services and Markets Act (FSMA) 2000, to make it easier for the FCA to apply specific, tailored rules to UK firms participating in the secondary annuities market
• introducing secondary legislation to amend the By Way of Business Order ^{[footnote 2]} under FSMA 2000, to make clear that those buying rights to annuity income streams in this market will always be deemed to be doing so by way of business, and will therefore always be subject to the requirement to be authorised or exempt under FSMA and the RAO
• legislating under the power given by the Bank of England and Financial Services Bill to define who will be required to take appropriate financial advice prior to selling their annuities, and what would constitute appropriate financial advice
• examining whether it is necessary to amend pension legislation to make clear that parties to an annuity contract may agree to vary contractual prohibitions on the assignment of annuities

This document invites comments on the draft secondary legislation the government intends to introduce in order to amend the RAO, the By Way of Business Order and other secondary legislation under FSMA. These changes propose:

• to create a new specified activity for firms intending to purchase annuities in the secondary market
• to create a new specified activity for firms intending to act as intermediaries in the secondary market
• to create a new specified activity for annuity providers who are intending to buy back annuities they have issued
• to amend the Appointed Representatives Regulations ^{[footnote 3]} to allow appointed representatives, acting under the responsibility of an authorised principal, to be exempt from the requirement to be authorised to act as intermediaries in the secondary market and for the buying back of annuities
• to amend the Financial Promotions Order ^{[footnote 4]} to ensure that unauthorised persons are prevented from engaging in financial promotions in relation to investment activity on the secondary annuities market; and
• through a separate statutory instrument (subject to the affirmative Parliamentary procedure), to amend the By Way of Business Order to make clear that those buying rights to annuity income streams in this market will always be deemed to be doing so by way of business, and will therefore always be subject to the requirement to be authorised or exempt under FSMA and the RAO

How to respond

Responses are requested by 2 June 2016. The government cannot guarantee that responses received after this date will be considered.

The government invites feedback on the draft secondary legislation in the annexes to this consultation and the accompanying impact assessment, in addition to the specific questions raised in this consultation document.

Responses can be sent by email to catherine.zeng@hmtreasury.gsi.gov.uk. Alternatively, they can be posted to:

Secondary Annuities Market Consultation
Insurance and Financial Regulators
Financial Services Group
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

When responding, please state whether you are doing so as an individual or representing the views of an organisation. If you are responding on behalf of an organisation, please make clear who the organisation represents and, where applicable, how the views of members were assembled.

Confidentiality

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes (these are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 and the Environmental Information Regulations 2004).

If you would like the information that you provide to be treated as confidential, please mark this clearly in your response. However, please be aware that under the FOIA, there is a Statutory Code of Practice with which public authorities must comply and which deals, among other things, with obligations of confidence.

In view of this, it would be helpful if you could explain why you regard the information you provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. In the case of electronic responses, general confidentiality disclaimers that often appear at the bottom of emails will be disregarded unless an explicit request for confidentiality is made in the body of the response.

2. New regulated activities

This chapter discusses the proposed secondary legislation that will implement the government’s preferred approach to the regulation of the secondary market for annuities.

The government set out its intention to restrict buyers in the secondary annuities market to Financial Conduct Authority (FCA) authorised buyers. To facilitate this, the government has decided to make appropriate amendments to the RAO to create a new specific regulated activity for purchasing rights under an annuity on the secondary market.

The government also considers it appropriate and therefore proposes to provide for further separate and specific regulated activities for annuity providers buying back an annuity, and for parties acting as an intermediary in the secondary market for annuities.

Regulation of specified secondary annuity market activities will enhance the ability of the FCA to oversee and supervise firms’ conduct in respect of those activities. In particular, it will enhance the ability of the FCA to:

• write and implement specific rules in relation to the process of selling income streams under annuities on the secondary market, which could include, for example, the systems and controls requirements that firms will need to have in place
• supervise the conduct of firms involved in the secondary annuities market. Such supervision may include regular reviews of firms’ procedures as well as an assessment of performance of the activities
• take appropriate regulatory action for any misconduct if a firm does not conduct itself in line with the standards set out in the applicable regulatory requirements

Collectively, these new activities will help to facilitate a clear and robust regulatory regime, which should in turn help the establishment of a credible and competitive secondary market for annuities.

Amendments to the Regulated Activities Order

An activity is a “regulated activity”, if it is of a kind specified in the RAO, is carried on by way of business, and relates to an investment of a kind specified in the RAO. All firms carrying out regulated activities in the UK must either be authorised or exempt (Section 19 of FSMA). Carrying out a regulated activity without authorisation or exemption is a criminal offence.

As with all regulated activities, these new activities will be subject to conduct regulation in all cases by the FCA, and prudential regulation by the PRA if the person carrying it out is a PRA-regulated firm.

The draft Order at Annex B proposes three new specified activities, which are defined as:

• entering into a regulated annuity assignment agreement as a purchaser
• entering into a regulated annuity buy back agreement as an annuity provider
• regulated annuity broking

The activities and persons involved in each of the new specified activities are defined below the activities themselves. For example:

• a regulated annuity assignment agreement is an “annuity assignment agreement” that is not an “exempt agreement”. Exempt agreements are those that the government has specified as being outside the scope of the secondary annuities market, which will be defined by DWP in secondary legislation to be laid in May 2016. “Annuity assignment agreement” is defined as an arrangement which results in an annuity holder selling to a person (the “purchaser”) the right or rights to payments, which may include any ancillary rights relating to those payments, under a contract to pay an annuity on human life. “Annuity holder” is defined as the person who for the time being is the legal holder of a policy which is a contract to pay an annuity on human life, and includes any person to whom, under the policy, a sum is due, a periodic payment is payable or any other benefit is to be provided, but does not include a person to whom such sums, payments or benefits are provided or are due as a result of a prior regulated annuity assignment agreement

• a regulated annuity buy back agreement is an “annuity buy back agreement” that is not an “exempt agreement”. Again, exempt agreements are those that will be defined by DWP in secondary legislation to be laid in May 2016. “Annuity buy back agreement” is defined as an arrangement in which the annuity holder sells back to the annuity provider the right or rights to payments. “Annuity holder” is defined as above and “annuity provider” is defined as the person who is obliged to make payments to an annuity holder or holders under a contract to pay an annuity on human life

• regulated annuity broking means any of the following activities, which would have formerly been captured by Articles 21 and 25 of the RAO:

a. entering into a regulated annuity assignment agreement or a regulated annuity buy back agreement as agent;

b. making arrangements for another person (whether as principal or agent) to enter into a regulated annuity assignment agreement or a regulated annuity buy back agreement; or

c. making arrangements with a view to another person who participates in the arrangements entering into a regulated annuity assignment agreement or a regulated annuity buy back agreement.

The current draft sets out that activities specified in Article 39A of the RAO (assisting in the administration and performance of a contract of insurance) are not included in the regulated annuity broking activity, and these activities should fall under Article 39A. The government accepts that some limited activities on the part of an intermediary, in some circumstances, could be said to amount to assisting in the administration and performance of contracts of insurance ^{[footnote 5]}. This means that those intermediaries who are undertaking both regulated annuity broking and any activity that would amount to Article 39A activity must have permission to carry on both activities ^{[footnote 6]}. However, it would be grateful to hear the views of consultees on that approach.

The proposed changes mean all firms wishing to “buy” rights under an annuity (as an annuity provider, third party or an agent), or make arrangements for another person to enter into transactions relating to the assignment or buy back of an annuity must be regulated by the FCA and apply for the specific permissions. Buying rights under an annuity (including buying back), acting as an agent and making arrangements for another person to enter into these transactions already fall within specified regulated activities in the RAO ^{[footnote 7]}. However, the government recognises that providing separate activities will be important to help efficient and effective regulation of the new market. For example, the FCA will be more easily able to identify and monitor those firms that they permit to transact in this new market, and will be able to impose appropriate conditions on those applying for a new or varied permission to undertake the new activities. It will also make it easier for the FCA to apply tailored rules specific to firms operating in the secondary market for annuities that, for example, may not be appropriate for existing markets for investment or insurance products.

The draft Order makes relevant exclusions to existing specified activities in the RAO by carving out the new activities related to buying and intermediating in relation to an annuity in the secondary market. This is to avoid duplication, and to ensure that firms with existing permissions are required to apply to the FCA to vary their permission to undertake the new specified activities. These exclusions include:

• excluding buy back activity and an annuity provider “facilitating” an annuity assignment or buy back agreement, or facilitating an assignment to an onward investor on the tertiary market, from article 10 (effecting and carrying out contracts of insurance)
• excluding the activities of entering into a regulated annuity assignment agreement as a purchaser, and entering into a regulated annuity buy back agreement as an annuity provider from article 14 (dealing in investments as principal)
• excluding regulated annuity broking from article 21 (dealing in investments as agent)
• excluding regulated annuity broking from article 25(1) and (2) (arranging deals in investments)

Purchases by the original annuity provider

The government agrees that there are benefits in allowing annuity providers to “buy back” their annuity from an annuity holder. Allowing buy back will reduce some of the transaction costs associated with assigning an annuity and this in turn could lead to higher lump sums being offered to annuity holders, and enabling providers to commute (wind up) their own annuities will help some providers in managing their capital.

However, through the consultation process the government has identified a number of risks around consumer protection and firm solvency that it is important to manage. The government has therefore proposed that buy back should take place through an intermediary. This is aimed at protecting against the significant risk that many consumers will be unlikely to shop around when seeking to sell their annuity income and mitigating the risk of potential public pressure forcing firms to buy back large volumes of their annuities that might risk their solvency.

It is also important to recognise though that selling an annuity back to the annuity provider through an intermediary may not always be the best option for every consumer. For example, those with very small annuities may find the requirement to transact through an intermediary to be prohibitive, for example the cost of fees charged by that intermediary may be disproportionately high compared to the value of the lump sum that the annuity holder ultimately receives from selling their annuity income. There is also likely to be less competition for smaller annuities on the open market, therefore consumers with smaller annuities are likely to receive less benefit from selling through an intermediary. It therefore may be appropriate to allow annuity providers to buy back lower value annuities directly.

The government believes it is important that all annuity holders are able to sell their income streams at a competitive price if appropriate. It has therefore asked the FCA to consider whether an intermediary requirement for buying back annuities would be necessary, and if so, whether there should be a threshold below which annuity providers can buy back an annuity directly.

We expect the FCA to consider this issue against its statutory objectives. The FCA objectives most likely to be relevant here include the objective of securing an appropriate degree of protection for consumers and promoting effective competition in the interests of consumers in this market.

Overseas persons

The government wants the secondary market for annuities to be open and competitive, and allow those wishing to sell their annuity income to get a fair and value for money price. The government does not intend to attempt to restrict access to the purchasing or intermediary market in secondary annuities to UK only firms. The draft Order therefore applies the overseas exemption in article 72 of the RAO to both purchasers and intermediaries provided that at least one other party to the transaction is an FCA authorised firm. This means that persons who carry on these activities from a place other than a permanent place of business in the UK will not be required to apply for UK authorisation, provided that at least one other involved in the transaction is authorised to undertake the appropriate regulated activities under FSMA.

General exclusions

In developing the new regulated activities, the government has considered how to apply existing general exclusions in articles 66 to 72H of the RAO, and intend to apply the following exclusions for the new annuity broking activity:

• Article 66 (trustees, nominees and personal representatives) – the exclusion applies to specified transactions, or activities, that are part of the discharge of the general obligations by the trustee or representative. The exclusion does not apply if the trustee or personal representative is remunerated for what he does.
• Article 72A (information society services) – the exclusion is required to comply with the e-commerce directive.
• Article 72C (provision of information on an incidental basis) – the exclusion replicates the current exclusion for arranging deals in investments and applies where the following conditions are met: the activity (a) relates to a contract of insurance; (b) consists of the provision of information to a policyholder; (c) is carried on by a person in the course of carrying on a profession of business that does not otherwise consist of regulated activities; and, (d) may reasonably be regarded as being incidental to that profession of business.
• Article 72H (insolvency practitioners) – this exclusion applies to a number of activities, including dealing in investments as principal or agent and arranging deals in investments, to allow insolvency practitioners to deal with or arrange investments in their capacity as such.

Box 2.A: Consultation questions

1 Do you have any views on the definition and scope of the proposed specified activities, including the draft exception provisions, in the draft Regulated Activities Order?

2 Do you have any views on allowing overseas purchasers and intermediaries to operate in the market, provided one of the other parties in the transaction is an FCA authorised firm?

3 Do you agree with the proposed general exclusions to the new regulated activities?

Appointed representatives

Appointed representatives under FSMA can conduct regulated activities on behalf of a principal directly authorised by the FCA or the PRA. The regime exempts from the requirement to be authorised those persons who have been appointed and have entered into a contract with an authorised principal that complies with the requirements of FSMA and relevant regulations.

The government has decided that the appointed representatives regime should apply to the new annuity broking permission and regulated annuity buy back. The draft order specifies that appointed representatives are exempt from the requirement to be authorised for the specified activity of regulated annuity broking and regulated annuity buy back. The government has not proposed any additional requirements applying to the contracts between authorised principals and appointed representatives engaging in annuity broking and regulated annuity buy back but welcomes any views on the need for additional requirements in this market.

Box 2.B: Consultation questions

4 Do you have any thoughts on allowing appointed representatives to be exempt from the requirement to be authorised for the new annuity broking and regulated annuity buy back permissions?

5 Do you have any views on the requirements applying to contracts between authorised principals and appointed representatives?

Financial promotions

The government considers it important to help ensure that consumers are protected from unauthorised cold calling or other unwanted marketing in relation to their ability to sell their annuity income on the secondary market. The government has therefore decided to extend the existing financial promotions regime under FSMA to the specified activities on the secondary annuities market.

In effect, the financial promotions regime restricts all types of financial promotion unless made or approved by an authorised firm or an exemption in the Financial Promotion Order is available. Unauthorised persons must not, in the course of business, communicate an invitation or inducement to engage in investment activity (which includes entering into an agreements relating to “controlled activities” as specified in the Financial Promotions Order). Contravention of the financial promotions restriction is a criminal offence.

The draft order amends the Financial Promotions Order by adding the new specified activities of (a) entering into a regulated annuity assignment agreement as a purchaser; (b) entering into a regulated buy back agreement as an annuity provider; and, (c) regulated annuity broking to the list of “controlled activities”. This means that communications of invitations or inducements to annuity holders to enter into transactions to assign or buy back annuities are covered by the financial promotions restriction.

Firms which are authorised under FSMA are not subject to the prohibition, but are required to comply with the relevant FCA rules on financial promotion.

Box 2.C: Consultation questions

6 Do you agree that the new specified activities should be covered by the financial promotion regime?

Amendments to the By Way of Business Order

The government outlined its intention to prohibit retail investment in the secondary market for annuities. Annuity incomes bought on the secondary market as investments are complex products and given the uncertainty around original policy holders’ life expectancy they are clearly not suitable for investors who do not have the underwriting capacity to price the complex mortality risk.

The Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 sets out the circumstances in which persons are, or are not, to be regarded as carrying on regulated activities by way of business for the purposes of FSMA. An activity is only a “regulated activity” if it is an activity specified in the RAO, related to a specified investment and is carried on by way of business.

The draft Order makes it clear that the specified activity of entering into a regulated annuity assignment agreement as a purchaser will in all circumstances be considered as being carried on by way of business, due to the highly complex nature of these investments. This will require all those who wish to purchase annuity income streams to apply for the appropriate FCA authorisation.

The changes to the By Way of Business Order are being effected in a separate statutory instrument to the changes being made to the RAO and other associated legislation. This is because under FSMA, changes to the By Way of Business Order are to be laid under a different Parliamentary procedure (the affirmative resolution procedure) to that which is required for the changes to the RAO and associated legislation.

Box 2.D: Consultation questions

7 Do you have views on the draft amendments to the By Way of Business Order?

3. Annex A: Consultation questions

The following box lists the consultation questions posed in this document.

Box A.1: Consultation questions

1. Do you have any views on the definition and scope of the proposed specified activities, including the draft exclusion provisions, in the draft Regulated Activities Order?

2. Do you have any views on allowing overseas purchasers and intermediaries to operate in the market, provided one of the other parties in the transaction is an FCA authorised firm?

3. Do you agree with the proposed general exclusions to the new regulated activities?

4. Do you have any thoughts on allowing appointed representatives to be exempt from the requirement to be authorised for the new annuity broking permission?

5. Do you have any views on the requirements applying to contracts between authorised principals and appointed representatives?

6. Do you agree that the new specified activities should be covered by the financial promotion regime?

7. Do you have views on the draft amendments to the By Way of Business Order?

1. The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544) ↩

2. The Financial Services and Markets Act 2000 (Carrying on Regulated Activities By Way Of Business) Order 2001 (S.I. 2001/1177) ↩

3. Financial Services and Markets Act 2000 (Appointed Representatives) Regulations 2001 (S.I. 2001/1217) ↩

4. Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (S.I. 2005/1529) ↩

5. Where such activities amount to both the administration and performance of a contractual obligation in connection with the assignment or surrender of an annuity on the secondary market. ↩

6. Excluding assisting in the administration and performance of contracts of insurance in the secondary annuities market context from Article 39A has not been considered as this may amount to reducing existing rights of insurance intermediaries to undertake insurance mediation activity under the Insurance Mediation Directive. ↩

7. Articles 10, 14, 21 and 25(1) and (2) of the RAO. There is an argument that an intermediary assisting an annuity holder to perform contractual obligations in connection with transactions on the secondary market would be undertaking activity within Article 39A of the RAO ↩