With-profit fund regulation slammed
Updated on 19 June 2008
The City watchdog has been criticised for failing to protect the interests of policyholders in with-profit funds.
The Treasury Select Committee said the Financial Services Authority (FSA) was not providing a robust enough framework to manage the conflicts of interest relating to so-called inherited estates.
The term inherited estate refers to money that has built up in with-profits funds over the years that is surplus to what is needed to meet the fund's liabilities. The money accumulates because insurers withhold a proportion of investment returns during good years to pay out in bad ones.
But companies' use of inherited estates has been the subject of controversy in recent years, with consumer groups arguing that they should not be allowed to use the money to meet mis-selling claims, pay shareholders' tax and subsidise new business. They instead argue that the money should be returned to policyholders through a special distribution.
The Treasury Select Committee agreed that it was "inappropriate" for firms to pay compensation to people who were mis-sold products out of the inherited estate, arguing that these costs should be borne by shareholders.
Chairman of the Committee John McFall said: "I was astonished that the Prudential had taken £1.6 billion from their inherited estate to pay the costs of compensation arising from mis-selling.
"By reducing the size of the inherited estate in this way, the firm's policyholders have a much lower chance of receiving a special distribution than they would have done otherwise."
The FSA is currently looking at the issue, and launched a consultation last month with a view to ending the practice.
The Committee was also critical of firms for using surplus funds to pay shareholder tax and called on the FSA to consult on ending this by the end of 2008.
Overall, the report said the FSA had failed to develop clear principles for the regulation of inherited estates, instead becoming "embroiled in making judgments in the round" and "micro-regulating particular firms' situations".
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