Britain's financial watchdog is to 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, a source familiar with the matter said on Friday.
These savings policies, sometimes described as "zombie funds", are closed to new investors and are typically owned by elderly people who might have forgotten about them.
The Financial Conduct Authority (FCA) is concerned that 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.
The FCA will outline the review into these 150 billion pounds ($249 billion) of savings in its annual business plan to be published on Monday, the source said.
Shares in insurance groups such as Resolution, Aviva, Prudential, Standard Life and Legal & General tumbled on Friday morning after the Daily Telegraph newspaper said the probe could lead to the exit penalties being waived for some savers.
Tim Tookey, chief financial officer of Resolution, which saw shares tumble 14 percent making it the biggest loser on Britain's blue chip FTSE 100 index, told Reuters the group operates a customer committee staffed by senior members of its closed and open life businesses that ensures rules on treating all customers fairly are followed.
Legal & General called on the FCA to bring forward publication of its plans and clarify its position "in view of today's disorderly market."
Resolution's Tookey agreed.
"It would help everybody if the FCA brought forward publication of the plan. That would be giving all investors and the markets comparable information," he told Reuters.
The FCA had no immediate comment.
News of the investigation marks the third blow in two weeks for Britain's insurers as the authorities seek to encourage people to save for old age at a time when public coffers are stretched and people live longer.
Britain's finance minister George Osborne announced last week that retirees won't be forced to buy an annuity with their pension pots, 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 will 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, with one option being to ban so-called exit fees which, in extreme cases, eat up half the savings pot.
"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, and saw shares drop 8 percent on Friday, said the company 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)