The Financial Services Authority (FSA) has made a damning assessment of the with-profits market, stating that a ‘significant number’ of with-profits firms are not running their businesses well. The regular also says policyholders’ interests are not being properly protected.
The FSA’s review identified two key areas of concern. Firstly, it stated that many with-profits providers were governing their funds ineffectively and that the with-profits committees, which decide the levels of bonuses paid to policyholders, were not challenging enough decisions on behalf of policyholders.
Failures were also identified in the competency of the literature provided by with-profits firms to consumers. The FSA says many policyholders have not been receiving ‘sufficiently comprehensive, timely and clear information to help them understand their policies.’
Two firms have been referred to the FSA’s enforcement department for further investigation, but the regulator would not name the companies in question.
FSA investigates with-profits firms
One of the major issues that the FSA found when investigating 17 with-profits firms (80% of the with-profits market) was the lack of governance within the with-profits committees set up to look after policyholder interests in with-profits funds.
The report stated that some with-profits providers were inadequately engaging with their committees and, therefore, the interests of policyholders were not being protected.
It also identified that major decisions in relation to with-profits funds, such as setting bonus rates, apportioning charges and expenses and determining what share of payment policyholders receive, was not being decided by the independent committee but by the with-profits providers themselves.
The independence of the committees was also called into question when the FSA revealed that some with-profits committee members were also Board members of with-profits providers. While a few firms had appointed independent actuaries to make decisions relating to policyholder payouts, they were deemed to be unsuitable by the regulator as they were often linked to the with-profits firms or appointed my members of the Board.
This represents a direct conflict of interest and demonstrates that, in many cases, policyholders’ interests have not been looked after appropriately.
Huge with-profits market
At the end of 2009, the FSA stated that there was £330 billion invested into various with-profits products, with around 25 million policies held by consumers. This represents a massive proportion of the savings market.
Yet the review of the with-profits market found that much of the communication sent to consumers by with-profits providers was difficult to understand, and did not adequately show the risk and reward balance of the funds. The FSA highlighted the following key issues in consumer communication:
- Weak explanations of how with-profits funds and smoothing work, and a lack of warning that some bonuses may not be paid on a regular basis;
- Limited detail on charges and expenses levied on policyholders;
- Minimal disclosure on strategic investment decisions;
- Poor guidance on the discretion used by with-profits firms.
With-profits policyholders getting unfair deals
However, the FSA stood by its involvement in recent distributions of inherited estates, the surplus cash held by with-profits funds to meet their liabilities and guaranteed payouts. It said that the recent payouts from Aviva were largely satisfactory, despite objections from many consumers and directly from Which?.
Yet in spite of this, policyholders have missed out on millions of pounds in other reattribution deals. We revealed yesterday that policyholders could have been entitled to a £1 billion payout if the FSA and High Court had not approved AXA’s inherited estate payout in 2000.
Which? slams FSA over with-profits regulation
As the FSA published its latest review of the with-profits sector, Which? chief executive, Peter Vicary-Smith, said:
‘Despite reviews dating back as far as 2001, the FSA has continually failed to look out for the interests of with-profits policy holders. It effectively looked the other way when Prudential*, AXA and then Aviva plundered the inherited estates of their with-profits funds and failed to act despite criticism from Which? and the Treasury Select Committee.
‘The FSA must name the firms that it is referring for enforcement and set in place rules that will ensure fair treatment for with-profits policyholders.’
What to do with your with-profits policy
For more information on with-profits and how to deal with your policy if you have one, read our in-depth guide to with-profits funds.
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