FSA betrays financial services customersWhich? slams regulator over inherited estates

24 July 2009

Which? campaigners have criticised the Financial Services Authority for allowing life insurance companies to continue using their customers' with-profits funds to pay for their mis-selling costs.

The FSA confirmed on Friday that while insurers would not be allowed to use money from with-profits funds to pay for any costs of future mis-selling, they could continue plundering these funds to pay for previous blunders.

Which? chief executive, Peter Vicary-Smith, says: 'This is an unbelievable betrayal of consumers who are taking hits from all sides. It appears the FSA is allowing the financial services industry to dictate policy once again.

'In the current environment it seems ludicrous that firms can raid with-profit funds to pay for their own regulatory failings. The FSA must stand up to this industry.'

Mis-selling fees charged to inherited estates


You may be spending money on expensive insurance you’ll never be able to claim on

Where life firms have been punished by the FSA for mis-selling with-profits products to policyholders, they generally receive a fine and are ordered to pay compensation to the policyholders affected. The FSA’s rules currently allow the companies who have mis-sold the policies to charge the compensation costs to the inherited estate - the part of the fund to which no individual policyholder has any specific claim.

A recent Treasury Select Committee inquiry revealed that Prudential had so far charged £1.6bn, while Norwich Union has so far charged £202m and had set aside a further £64m for future claims.

Which? says: FSA move allows firms to dodge consequences of mis-selling

Which? believes firms should have to bear all the costs of mis-selling and is concerned that the current system goes against all principles of good corporate governance by allowing shareholders to avoid responsibility.

In June 2008, the FSA proposed it would change the rules for all payments made after 1 November 2008, regardless of when the mis-selling occurred. But in a consultation published in February this year, the regulator went back on the original proposal and set out plans to only apply the new rules to policies sold after July 2009.

Compared with previous levels of business, there are now very few with-profits policies sold each year, so the FSA’s proposals will have an extremely limited impact. Firms will continue to be able to dodge the consequences of past mis-selling and millions of pounds will continue to be taken from the funds.

Where did the inherited estate money come from?


If your tax code is wrong, you could be paying too much tax

Some with-profits funds have built up money over time which is surplus to the amount needed to meet policyholder commitments and other obligations. This money is referred to as the ‘inherited estate’. In many cases it was built up because companies held back too much money from policyholders during the ‘smoothing’ process. Norwich Union, Prudential and Legal & General are among the companies who have significant ‘inherited estates’.

What's the problem?

Companies say they use the money to ensure the stability of the funds, but in reality they don't have to use this money in policyholders’ interests. Instead they can take money from the inherited estate to pay shareholders’ tax bills, subsidise new business and even pay compensation when the company has broken the rules and mis-sold a policy.

Billions of pounds have been taken from the inherited estates for reasons like these. For example, Prudential used £1.6bn pounds to pay compensation for mis-selling, while Norwich Union used £202m and set aside a further £64m for this purpose.

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