The announcement formed part of the regulator's response to a
Treasury Committee report which criticised the ways in which firms
are allowed to use the surpluses that have built up over time in
their with-profits funds.
The Committee found that the current regulatory framework fails
adequately to protect policyholders' interests in such surpluses
(known as the inherited estate), as against those of the company
and its shareholders.
The report strongly criticised the use of the surplus to pay off
shareholders' corporation tax bills following a distribution and
the practice of 'phasing' distribution payments to policyholders
over time, discouraging policyholders from leaving the with-profits
fund.
It also highlighted the conflicts of interest inherent in the
company using the inherited estate to fund its own future growth,
particularly if it is already considering buying out policyholders'
interests in the surplus (a process known as a reattribution).
"We would welcome a reopening of the debate about the
fundamental design of the regulatory system for with-profit funds,"
the report concluded.
But the FSA, which carried out a major overhaul of the
with-profits regime only a few years ago, believes the real issue
is not the regulations themselves, but how they are being put into
practice.
In a response published last month, it defended its approach. On
the issue of shareholder tax, for instance, it commented: "We do
not think the position is as clear-cut as the Committee argues … We
remain of the view that the decision to permit this specific
practice to continue where it was disclosed to new and current
policyholders was reasonable".
"More generally, we believe that our framework of rules already
covers the range of activities that might take place in managing a
with-profits fund and the ways in which firms might use their
discretion in doing so," it said. "Therefore we do not currently
believe that there is a need to specify more closely the uses to
which a with-profits fund can and cannot be put, over and above
those rules and guidance which we have already issued."
But, the regulator added: "The existing with-profits regime has
been in place for three years. While we supervise individual
firms as issues arise, we have not yet carried out a systematic
information-gathering exercise to determine conclusively how senior
management in firms have implemented the rules, individually and
collectively."
"We believe now is the right time to do that," it said. "We will
therefore be conducting a comprehensive review".
The FSA will also consider clarifying some aspects of the
reattribution process, building on practical experience gained in
recent transactions, such as the ongoing Norwich Union
reattribution.
For instance, the FSA believes it would be helpful to publish
more information on the roles and responsibilities of all parties
to the process and to set out the factors it takes into account
when forming a preliminary view on whether a company's proposals
are fair.
Another suggestion is that firms should be required to seek the
regulator's permission before announcing a reattribution to avoid
the uncertainty that can be caused by premature publicity and
enable the FSA to make sure that the company is ready to proceed to
the next stage.
Commenting on the FSA's paper, Clare Spottiswoode, policyholder
advocate in the Norwich Union reattribution said:
"This is a curate's egg of a response to a very clear report
from the Treasury Committee. The FSA's fundamental policy stance
has not changed and it remains difficult to see how the FSA can
justify its support for the use of the estate to subsidise the
capital cost of writing new business or for paying shareholder
tax.
"These rules mean that shareholder interests are still favoured
over policyholder interests," she said.
Bruno Geiringer, a partner specialising in life insurance at
Pinsent Masons, the law firm behind OUT-LAW.COM, said: "The FSA's
response makes it clear that life insurers must now focus their
attention on compliance with the current rules and not become
side-tracked by debates about potential rule changes."
"Since the new with-profits regime was introduced in 2005, the
FSA has repeatedly warned senior management to take a greater
interest in the fair treatment of policyholders. Over the coming
months, many insurers will have a lot of work to do to improve the
way they manage their with-profits funds, deal with conflicts of
interests and communicate with their policyholders," he said.
The FSA plans to publish the results of its with-profits review
by the end of 2009, when it will consider whether the current rules
need any further amendment or clarification.
In the meantime, it is progressing with its proposal to prevent
life companies using the inherited estate to fund compensation
payments for mis-selling claims – a move welcomed by the Treasury
Committee in its report.
"We have received a substantial response to the consultation,
representing a wide spectrum of strong views," the FSA said. "We
are currently considering the responses and intend to issue a
policy statement before the end of the year".
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