* Probe is third knock to savings sector in two weeks
* Policies written before 2000 will be inspected by FCA
* Insurers are the top six fallers on the FTSE-100 index
* Legal & General says market disorderly due to probe news
* FCA launches external probe into how it handled
(Adds FCA board to investigate how announcement handled)
By Chris Vellacott and Huw Jones
LONDON, March 28 Britain's financial watchdog
will investigate whether people locked into some 30 million
pension and other savings plans sold by insurance firms in the
30 years after 1970 are treated fairly compared with new
clients, it said on Friday.
Shares in insurers including Aviva, Legal & General
, Prudential, Resolution and Standard
Life fell sharply on speculation the probe could lead to
changes that affect the profitability of the products.
The investigation is the third blow in two weeks for the
industry, after the government unexpectedly said last week that
retirees would no longer be forced to use pension pots to buy
annuities - a major source of insurers' income - sending shares
in the sector sharply lower on the day.
On Thursday the government announced a cap on management
charges for some workplace pension schemes.
The Financial Conduct Authority's (FCA) investigation
unveiled on Friday relates to about 150 billion pounds ($249
billion) of savings policies sometimes described as "zombie
funds", which are closed to new investors and typically owned by
elderly people who might have forgotten about them.
The watchdog is concerned these savers are being treated as
a captive market because of costly penalties for withdrawing
early or stopping further payments which were built into these
policies, written before 2000 when interest rates and expected
returns were higher.
"These accounts have been closed for many years in some
cases, but there are still valid issues to be looked at around
the question of the service that consumers receive in relation
to those accounts," the FCA said in a statement.
"Are they getting the right information? Are they getting
the right level of service? Are these investments still
appropriate?" the watchdog added.
The FCA was due to announce the probe in its annual business
plan to be published on Monday. But an interview with a senior
FCA supervisor in the press on Friday outlining the review sent
shares in insurers tumbling.
This prompted requests from the industry for the watchdog to
bring forward its announcement, which it did barely two hours
before close of trading in a market Legal & General described as
having become "disorderly".
In a rare move after the end of trading, the FCA issued a
second statement saying its board acknowledged market concerns
regarding press coverage of the planned investigation.
"The board will conduct an investigation into the FCA's
handling of the issue involving an external law firm and will
share the outcome of this work in due course," the FCA added.
Such a step will be embarrassing for the FCA just as the
young watchdog, which marks its first anniversary on Tuesday, is
trying to establish its credibility.
The Daily Telegraph newspaper had said the probe could lead
to exit penalties being waived for some savers. But the FCA said
the review wouldn't look at sales practices - such probes have
led to hefty fines - and it was not looking to apply current
standards on old policies, such as on exit charges.
This helped insurers' stocks recover some of their losses,
but at 1525 GMT they still accounted for the six biggest fallers
on the benchmark FTSE-100 index, with Resolution down 7
percent, Aviva sown 5 percent and Legal & General off 4 percent.
Tim Tookey, chief financial officer of Resolution, told
Reuters the group operates a customer committee staffed by
senior members of its closed and open life businesses that
ensures rules are followed on treating all customers fairly.
The UK government is seeking to encourage people to save for
old age at a time when public coffers are stretched and people
Finance minister George Osborne announced earlier in March
retirees wouldn't be forced to buy an annuity with their pension
pots, in the biggest shake-up in pensions in nearly a century.
Then on Thursday the government said annual management
charges on workplace pension schemes that automatically enrol
employees would be capped at 0.75 percent from April next year
to "end rip-off pension charges".
The FCA review will start this summer and is due to be
concluded by the end of the year.
Analysts said any ban on so-called exit fees which, in
extreme cases, eat up half the savings pot, would be a heavy
blow for insurers.
"Should investors be allowed to exit policies and look for a
better deal, the sector may be punished with large outflows of
money from some zombie funds," Mike van Dulken, head of research
at Accendo Markets, said.
There are 30 million such funds in existence, dating back to
the 1970s, but the FCA will only look at a selection of them.
The head of Chesnara, which buys up closed life and
pension books, said it had little to fear from the review.
"It doesn't look like it's going to be a major issue for us
because we only do closed books ... We haven't got the ability
to start overcharging people in old funds, and we've only got
old funds," said Chesnara Chief Executive Graham Kettleborough.
($1=0.6019 British pounds)
(Additional reporting by Esha Vaish; Editing by Alexander
Smith, Greg Mahlich and Mark Potter)