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The Actuary The magazine of the Institute & Faculty of Actuaries
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Treasury Select Committee slams FSA over with-profits

The Financial Services Authority (FSA) has come under fire from the recent Treasury Select Committee (TSC) investigating Inherited Estates. In a press release coinciding with the release of the committee’s report, the committee chair the Rt Hon John McFall MP dismissed the FSA’s approach to regulating with-profits estates as “barmy”.

He added: “The approach taken by the FSA towards inherited estates seems a long way from the philosophy of principles-based regulation to which it aspires. Policyholders need to have confidence that their interests are being protected, but the current oversight by the FSA gives no such assurance.”

The TSC held an inquiry in April (reported in the June issue of The Actuary), having heard evidence from representatives of key stakeholder groups, including consumer group Which?, the Aviva policyholder advocate Clare Spottiswoode CBE, the FSA and the CEO’s and senior actuaries of Prudential and Aviva. Conflicts of interest and a lack of clear guiding principles were key issues in the claims made against the present state of with-profits estate regulation.

The committee has called on the FSA to beef-up current regulation and improve transparency, particularly in the area of smoothing of investment returns. The TSC recommends that where industry fails to employ transparent smoothing techniques the FSA should intervene to enforce this. It criticised the FSA’s approach to date, saying that rather than developing clear principles for estate management it has become embroiled in “making judgements in the round and micro-regulating particular firms’ situations”.

Furthermore, the TSC expressed surprise at how companies have been allowed to use the inherited estate of with-profits funds until now. McFall highlighted Prudential’s use of £1.6bn of its inherited estate to pay mis-selling compensation as an example of policyholder returns being diminished inappropriately. Also cited was the use of the estate to pay shareholder tax as a “striking example of how certain life firms are able to use their discretion in a way that furthers shareholder interest to the detriment of policyholders”. It urges the FSA to conduct a consultation on this issue.

The April evidence sessions produced another bone of contention — that of phasing special distributions to policyholders when distributing excess surplus. Aviva, intending to phase its distribution over three years, argued that this approach rewarded loyalty and benefited a large enough proportion of the appropriate generation of policyholders. It admitted that approximately 4% of policyholders — or 40 000 — would not receive all three payments.

The increased risk of higher rates of withdrawal following any one-off distribution was also cited as a potential threat to the stability of with-profits funds. In its report, the TSC stated that these and other arguments for phasing distributions were not sufficient. The suggestion that policyholders may leave a fund after receiving a special distribution implied (to the TSC) that “policyholders were desperate to leave that fund, and continued as policyholders only to receive their special distribution payouts”. Phasing of payouts would then constitute an “unreasonable barrier to exit” contrary to FSA principles.

More recently, Prudential has announced that it will not be conducting a reattribution exercise at this time. The report, summarising the committee’s findings and recommendations, is available at:
www.parliament.uk/parliamentary_committees/treasury_committee/inheritedestate.cfm