Policyholders shortchanged by FSA over inherited estate ?
The FSA’s latest consultation paper on compensation and redress payments from With Profits Inherited Estates will disappoint many as it now favours shareholders at the expense of policyholders.
The inherited estate refers to the part of a with profits fund beyond that required to meet its liabilities. It includes any excess surplus in the fund. Under rules governing compensation and redress payments a firm can pay mis-selling claims from either this inherited estate or from shareholder attributable assets. These rules came into force in 2005 and are a continuation of a 15 year old policy from the Department of Trade and Industry. The reality was that the inherited estates were used extensively to meet compensation costs and even for paying the shareholders tax bill. Norwich Union has charged £202 million so far and set aside £64 million to meet future claims. Treasury Select Committee Inquiry into the Inherited Estates Chairman, the Rt Hon John McFall MP, was “astonished that the Prudential had taken £1.6 billion from their inherited estate to pay the costs of compensation arising from mis-selling.” The insurers have been adamant in their right to use the estates. Prudential asserts the estates are owned by the company and not by policyholders. Norwich Union, in written evidence to the Committee, stated that since the benefits of new business are distributed with 90 percent going to policyholders and 10 percent to shareholders it is logical for any costs arising (from mis-selling) “to also be shared on a 90:10 basis.” Their view is that policyholders should not expect anything from the inherited estates and that any payments they do receive should be regarded as a windfall.
The Treasury Select Committee felt it was inappropriate to charge mis-selling costs to the inherited estate as these should be borne by shareholders since it was their responsibility through the managers of the firm “to ensure that staff behave appropriately when selling products.” It was also noted that charging shareholder tax to the estates “furthers shareholder interest to the detriment of policyholders.” Other support came in evidence from consumer group Which? who claimed the FSA had failed to protect policyholders’ interests.
Last year it appeared the FSA had taken note. In a consultation paper it proposed that shareholders alone should meet the cost of future mis-selling compensation and redress payments as the FSA considered the current rules “may not lead to the fair treatment of policyholders.” Importantly it added that the rules would be changed for all payments made after 1 November 2008, regardless of when the mis-selling occurred.
In an apparent about turn, the latest FSA consultation paper proposes that changes should only apply to compensation and redress payments resulting from events that take place after the new rule comes into force in July. The reason given by the FSA is that the proposed change is based on their revised judgement of what is fair and therefore should only apply to events that take place after the new rules come into force. Additionally they say their thinking on the topic has been “refined and developed” since last year. Which? chief executive, Peter Vicary-Smith, said “With bonus rates plunging and transfer penalties being introduced, the last thing people need is firms raiding with-profit funds to pay for their own regulatory failings. It’s outrageous that insurance companies will be let off the hook, depriving policyholders of millions of pounds.”
The new rule will now have little impact since there are a comparatively small number of with-profits policies sold each year. The issue that needed to be addressed was use of the inherited estate for payments made prior to the new rules, something the earlier FSA consultation paper appeared to confront. The changes now made by the FSA leaves existing policyholders in the same position they were before. “The FSA has, once again, left policyholders in the lurch and sided with the financial services industry. This regulator repeatedly shows it’s unwilling to stand up for the interests of with-profits policyholders” said Which? chief executive.
For policyholders the regulatory clock has gone backwards and expectations that the FSA would look after their interests have not to have been met. Last year the Treasury Committee concluded that “Policyholders need to have confidence that their interests are being protected, but the current oversight by the FSA gives no such assurance.” The latest consultation paper suggests such assurance is still lacking.
Related documents:
CP09/9: With-profit funds – compensation and redress: Further consultation, feedback on CP08/11 (Latest FSA Paper information page)
FSA Consultation paper 08/11 ‘With-profits funds – compensation and redress’ (June 08) (Earlier FSA Paper information page)
Select Committee on Treasury Twelfth Report – With Profits and the Inherited Estates
