FSA acts on with-profits providers
The Financial Services Authority has launched enforcement investigations into two with-profits businesses for governance and management failings that exposed policyholders to “particularly acute” risks.
The probes into the two unnamed companies come at the end of a review of the with-profits sector – which holds £330bn ($497bn) of savings across 25m policies – and could be followed by disciplinary action against other companies if they do not take steps to improve the running of such businesses.
The FSA said its review found failings in one or more areas of the majority of with-profits businesses, “potentially exposing a significant number of with-profits policyholders to risk”.
“The findings are particularly disappointing in light of our previous communications to the sector [over the past three years],” it said.
With-profits funds, which give savers long-term exposure to equity markets with protection against stock market falls, have achieved a poor reputation because of the bad design of some products and the high penalties often imposed for withdrawing money early.
Few new policies are sold compared with the boom in with-profits products in the 1980s and 90s. Almost £100bn has been cashed out of the sector since 2005 and independent experts have predicted another £60bn could be withdrawn over the next couple of years.
The FSA’s review pinpointed two main areas of concern. First was ineffective governance, especially a lack of independent challenge on the committees that oversee with-profits funds. Second, there were significant weaknesses in the quality of communications with policyholders.
“We expect all firms to raise their game in this area, not just the firms we reviewed,” said Ken Hogg, director of the FSA’s insurance sector.
“While there has been some progress, there is still more work to be done by firms to make sure that their policyholders are treated fairly.”
Peter Vicary-Smith, chief executive of Which?, said the FSA had continually failed to look after with-profits policyholders’ interests, particularly in terms of insurance companies’ use of surplus funds belonging to policyholders, known as inherited estates.
“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,” he said.
Clare Spottiswoode, the independent policyholder advocate during Aviva’s recent reattribution of its inherited estate, raised concerns in her final report last year over the transparency, governance and regulation of with-profits funds.
The FSA said on Tuesday that it plans to strengthen its rules to provide “greater protection” for with-profits policyholders with a consultation paper launched by the end of the year.
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