Tell all on with-profits funds

INSURERS will be forced to reveal much more about the financial strength of their with-profits funds and how they are run under a series of proposed regulatory changes aimed at rebuilding investor confidence in the popular savings schemes.

The changes planned by the Financial Services Authority seek to let investors compare the solvency of various with-profits funds and their ability to meet guaranteed and discretionary benefits.

The proposals, a direct response to recent events such as the Equitable Life disaster and the endowment mortgages debacle, also require firms to publish a set of principles and practices by which a fund is run and to report to policyholders annually on whether they are being adhered to.

With-profits policies account for a huge slice of Britain's long-term savings market, with a total estimated value of about £385bn. They are designed to smooth the ups and downs of financial markets by using some of the profit made in good years to boost returns in bad times.

Details of the suggested changes are in a consultation paper published by the FSA, although the new regulations are not expected to be in force until at least early next year.

'Many of the features that have allowed with-profits investments to deliver superior returns in the past are precisely the features that give rise to concerns about the lack of transparency and poor consumer understanding,' said FSA chairman Sir Howard Davies. The FSA said investors would have greater confidence they were being treated fairly if with-profits funds set up an independent committee to ensure their interests were protected. The regulator also wants to force insurers to standardise ways of calculating and reporting a fund's realistic liabilities.

The life industry said the proposals would help renew confidence in with-profits policies. But the Consumers' Association attacked them as 'pathetic and naive'. Senior policy adviser Mick McAteer said: 'The FSA doesn't seem to have the ability or the desire to get to grips with this industry. Transparency is all very well and should help future customers, but these proposals do absolutely nothing for the 10 million people who already have a policy.'

Mary Francis, director-general of the Association of British Insurers, said: 'It's a win-win for consumers and the industry. The FSA has adopted many of our own proposals.'