Be fair to customers warns FSA
The FSA has warned insurers they must be fair to with profits customers when cutting fund values and bonus payments.
In its latest Financial Risk Outlook, the FSA outlines what it sees as the major risks facing firms, consumers and the regulatory system in the recession. It recommends that consumers should be wary of financial deals which seem too good to be true and know where to go for impartial finance advice.
One page of the 90 page document focuses on the with profits sector. Here the FSA recognises that current low interest rates and major falls in asset values are a particular problem for with profits firms since the cost of policy guarantees is increased. It also accepts that insurers will use a number of strategies to preserve capital. These can include increased charges, reductions in terminal and annual bonuses plus increases or introductions of early redemption penalties with MVR’s.
Many of the actions accepted by the FSA have already been used by the insurers. Recently Norwich Union announced bonus cuts, Friends Provident cut bonus rates and adjusted MVR’s
, Standard Life increased MVR’s and cut bonuses, and Legal and General cut bonuses. While these strategies appear acceptable to the FSA and it feels its rules safeguard policyholders, the regulator warns “there is a risk that the mitigating actions firms take to deal with their financial pressures may result in policyholders not being treated fairly.” Just what being treated fairly entails is not specified but perhaps relates to operating within the FSA’s rules and principles. It’s possible this statement may one day be put to the test. There is also concern over poor communication as the document notes that even when the action of insurers is fair there is a “risk that poor communication may mean policyholders’ expectations are different to their experience.” It warns that either of these situations could have a negative impact on consumer confidence for the sector. Some may argue that confidence in the sector is already under pressure.
The FSA highlights some key messages for the life insurers and these include:
- Market conditions have put pressure on life insurers’ earnings and excess capital, increasing the operational risks they face and reducing the scope for risk taking.
- In determining necessary management actions, insurers must take into account their obligations to continue to treat their customers fairly.
- Firms holding corporate bonds should make a prudent assessment of the extent to which bond spreads reflect liquidity premiums, as opposed to the probability of default in valuing their long-term liabilities.
The Financial Risk Outlook 2009 offers two gloomy economic scenarios and one cheerful one. It also warns that loss of confidence in financial markets could lead to consumers disengaging with financial services. Some may see it as ironic the FSA is publishing a document forecasting risk when its recent record on assessing risks shows a few large ones were missed. The FSA should have followed their own advice to consumers – “be wary of financial deals which seem too good to be true”. It would have been even more helpful if this advice had been given to the leaders of the major financial institutions.
The Financial Risk Outlook is a 3.70 MB, 90 page, PDF file
