£3bn wiped off London’s insurance sector

Companies listed in London’s benchmark FTSE 100 were all hit, with shares in Resolution, the company behind Friends Life, tumbling 11pc, Aviva and Legal & General losing more than 5pc, Prudential declining 3pc and Standard Life falling 2.5pc after the Telegraph disclosed that the Financial Conduct Authority (FCA) is planning an inquiry into policies sold from the Seventies to the turn of the Millennium.

Concern about the impact of the review also sent Old Mutual down 0.5pc, while in the mid-cap FTSE 250 Phoenix plunged 12.3pc, and Partnership Assurance and Just Retirement both lost 3pc.

The review, to be announced next week and begin this summer, will include pensions, endowments, investment bonds and life insurance sold by doorstep salesmen who were often spurred on by large commissions.

The news caps a poor month for insurance shares, which fell sharply last week after Chancellor George Osborne announced in his Budget the biggest changes to the pensions industry in 90 years that most analyst say herald the death of the individual annuities market.

In a fresh blow to the sector, the FCA is concerned that insurers are now “exploiting” loyal policyholders, who are “not given the same priority as new customers” and instead face high fees and substandard service.

The intervention marks a victory for The Telegraph’s long-running campaign for action over rip-off charges, particularly on pensions that severely reduce retirement funds over time.

The FCA will say that at the heart of the inquiry is an “unfairness” whereby some insurers use the returns from so-called “zombie” funds — which are shut to new customers and often neglected by existing clients — to pay bills from other parts of their businesses.

A large number of policies also include obstructive exit fees that can halve a policy’s value if a customer attempts to switch to a cheaper provider.

The watchdog will consider banning these “lock-in” fees if such a measure is deemed a practical way to overcome the poor treatment of policyholders.