Which? calls for FSA to take action on inherited estates

Inaction by the Financial Services Authority (FSA) will prevent policyholders from getting a good deal from the reattribution of inherited estates in with-profits funds*, says Which?

Which? has long maintained that any reattribution of inherited estates should be on a 90:10 basis in favour of the policyholder.   There is at least £14bn at stake in the discussions currently underway at Norwich Union** and starting soon at Prudential. 

Which? has written to Hector Sants, chief executive of the FSA, expressing concern that the Conduct of Business rules allow companies too much leeway to use the inherited estate in ways which do not benefit policyholders.  These include paying shareholder tax bills, subsidising new business and paying mis-selling claims. 

Dominic Lindley, principal policy adviser, Which? comments:

“Unless the FSA takes action soon, policyholders will lose out on billions of pounds and shareholders will gain at their expense. 

“The FSA claims to be committed to treating customers fairly, but by appearing toprotect the interests of shareholders rather than policyholders, they are failing in their duty.  The FSA's own rulesare undermining the ability of policyholder advocates to secure a good deal.This is not a fair negotiation and it certainly isn't treating customers fairly.

“Without changes made soon, there is a very real risk that we will witness a rerun of the AXA case*** but on a much larger scale.  This will further erode and undermine public trust and confidence in the financial services sector – something it can ill afford.”

-Ends-

Notes to Editor

* The inherited estate is the term used to describe the surplus assets in a with-profits fund which have built up over many years. This largely comes about through underpayment to previous generations of policyholders.  FSA rules require insurers to nominate a policyholder advocate to negotiate on policyholders behalf about how the inherited estates are 'reattributed' between policyholders and shareholders.

** At Norwich Union, there are around 1.1 million eligible policyholders in the CULAC and CGNU life with-profits funds. The total size of the inherited estate in these with-profit funds was around £5 billion at the end of 2006. If Norwich Union policyholders were to receive 90% of the inherited estate their average entitlement would be around £4,000. At Prudential there are over 4 million eligible policyholders and the inherited estate is worth around £9 billion.

*** Which? went to court in 2000 to try to prevent AXA’s deal to divide unfairly its £1.7bn inherited estate between policyholders and shareholders.  The deal led to policyholders receiving just 31% of the inherited estate in the AXA with-profits fund. This was a very bad deal and policyholders lost out on over £1 billion compared to their 90% entitlement.