Move to 'fairer' with-profits savings

THE City regulator today unveiled wide-ranging proposals aimed at winning 'fair treatment' for with-profits policyholders. The move, undertaken by the Financial Services Authority, comes after growing criticism of falling returns from with-profits policies.

Around 10m policies were sold to mortgage borrowers as endowments. As many as 8m may not provide enough to clear the mortgage they were linked to. With-profits policies are also popular as savings for retirement.

The proposals include rules and guidance on payouts, surrender values, market value reductions, closed funds and the process for reattribution of inherited estates otherwise known as 'orphan assets'. There are also plans to give consumers a better understanding of how with-profits funds are run.

However, the FSA has failed to adopt all suggestions from last year's Sandler Review.

Sandler wanted total transparency on charges and the strength of all with-profits funds. He found administrative and distribution costs had risen in real terms over 15 years, by 5.7% and 10.8%, respectively.

The FSA has previously voiced concern that complete disclosure on funds might persuade investors to avoid weak funds during hard times, making them even weaker.

The FSA says it has adopted the spirit of the Sandler recommendations but not followed them to the letter.

FSA director of insurance David Strachan said: 'With-profits policies, which smooth returns, can have substantial benefits for policyholders, but they also have some specific characteristics, such as the large amount of discretion that firms retain over decisions, which can expose policyholders to unfairness.

'Today's proposals are about putting policyholders in a position where they can be more confident that their interests are being given fair consideration.'

He said it was 'critical' that the industry has confidence in the industry in future. The proposals include:

Published target ranges for payouts.

Market value reductions (MVRs) applied only if there has been either a significant change in the value of the fund's assets or if a high volume of surrenders has occurred or is expected.

Restrictions on what firms can charge to their with-profits fund. Only costs that are directly connected to the operation of the fund can be applied.

Compensation for with-profits policyholders should be paid first from any inherited estate and second from shareholders funds.

Insurance firms would also be required to give with-profits policyholders key information in clear and plain language on how their funds are run.

The consultation paper also includes proposals on how to make sure that with-profits policyholders are treated fairly during the process of reattribution of inherited estates – a complicated process of how surplus profits are given to policyholders. The FSA wants to introduce an independent 'policyholder advocate' to negotiate on behalf of policyholders.

The FSA began its review of with-profits regulation in spring 2001. The deadline for comments is 31 March 2004.

Many insurance companies have given up selling with-profits policies as plummeting stock markets, tightening regulation and high costs have squeezed earnings.

Britannic Group, Royal & Sun Alliance and Equitable Life have closed their with-profits funds, and analysts expect that in future only a handful of major players will compete in the with-profits sector.

Mary Francis, director general of the Association of British Insurers insisted that with-profits policies still appeal to many savers because they 'smooth the peaks and troughs of stock market performance'.

'The need for reform does not stem from customers being treated unfairly, but from the need to keep pace with changing consumer expectations of information and accountability,' she said.