Small number of UK insurers risk action over annuity sales

* FCA finds no evidence of industry-wide failure

* Removes fears of big bill for misselling policies

* Some firms may have to offer redress (Recasts first paragraph, adds comment from former pensions minister)

By Huw Jones and Carolyn Cohn

LONDON, Oct (Shenzhen: 000069.SZ - news) 14 (Reuters) - Britain's financial watchdog left the threat of penalties hanging over a "small number" of insurance firms on Friday for failures in the information on pensions provided to customers in poor health.

The overall finding that there had been no industry-wide wrongdoing came as a relief to a sector in the throes of sweeping changes and questions about fees and which feared a scandal similar to the mis-selling of payment protection insurance that has cost banks billions of pounds.

But some firms may yet have to pay compensation to customers who should have been sold a different type of annuity.

"Customers in poor health have been short-changed on their pension income for the rest of their shortened lives," said former pensions minister Ros Altmann who now speaks on industry issues.

The sums involved were relatively small. In cases where a customer would have been eligible for an "enhanced annuity", lost income ranged from 120 to 240 pounds ($150-300) a year.

The Financial Conduct Authority (FCA) investigated sales of this type of annuity -- a form of pension that pays out until death. The enhanced annuities typically offer people in poor health higher payouts than standard versions because they have a shorter life expectancy.

"The FCA found ... no evidence of an industry-wide or systemic failure to provide customers with sufficient information," the watchdog said in a statement on Friday.

"At a small number of firms the FCA did have concerns when significant communications took place orally, normally over the phone, which was likely to have caused some customers to purchase a standard annuity when they may have been eligible for an enhanced product."

These firms have been told to review such sales from July 2008 and, where appropriate, provide redress.

The need for proper advice has grown since April 2015, when the government removed the obligation on consumers to use their pension pots on retirement to buy an annuity.

Many of the customers in the FCA's sample had modest pension pots of about 25,000 pounds, making it more important to secure an enhanced annuity, the watchdog said.

If the FCA had found widespread failures, around 300,000 people might have had reason to claim they had been sold the wrong type of annuity over the seven-year period.

"It will be a relief to the industry that the FCA has not found widespread mis-selling," said Jason Whyte, director in UK life & pensions at consultants EY.

Insurance shares were up around 1 percent on Friday, in line with a rise in the FTSE 100 index. ($1 = 0.8042 pounds) (Editing by Elaine Hardcastle and Keith Weir)