UPDATE 3-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 pensionsminister)

By Huw Jones and Carolyn Cohn

LONDON, Oct 14 (Reuters) - Britain's financial watchdog leftthe threat of penalties hanging over a "small number" ofinsurance firms on Friday for failures in the information onpensions provided to customers in poor health.

The overall finding that there had been no industry-widewrongdoing came as a relief to a sector in the throes ofsweeping changes and questions about fees and which feared ascandal similar to the mis-selling of payment protectioninsurance that has cost banks billions of pounds.

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

"Customers in poor health have been short-changed on theirpension income for the rest of their shortened lives," saidformer pensions minister Ros Altmann who now speaks on industryissues.

The sums involved were relatively small. In cases where acustomer 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 ofthis type of annuity -- a form of pension that pays out untildeath. The enhanced annuities typically offer people in poorhealth higher payouts than standard versions because they have ashorter life expectancy.

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

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

These firms have been told to review such sales from July2008 and, where appropriate, provide redress.

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

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

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

"It will be a relief to the industry that the FCA has notfound widespread mis-selling," said Jason Whyte, director in UKlife & pensions at consultants EY.

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