Financial Conduct Authority
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FSA consults on change to with-profits rules

The Financial Services Authority (FSA) has today published a consultation paper (CP) which proposes that insurance companies will no longer be permitted to charge compensation for mis-selling to the inherited estates of with-profits funds. The proposals relate specifically to proprietary firms and not mutuals.

FSA rules currently allow firms to pay the costs of compensation and redress from the inherited estates of their with-profits funds. The FSA has re-examined these rules and concluded that there is a case to consult again on whether shareholders alone should meet the cost of compensation and redress as the current rules may not lead to the fair treatment of policyholders.

The inherited estate is the part of the with-profits fund that is judged to be surplus to what is needed to meet the fund’s liabilities. It is retained as working capital by firms, but may in future be distributable to policyholders. Inherited estates have built up over the years from different sources: premiums from past generations of policyholders and associated investment returns, and/or past capital injections from shareholders. FSA rules already require firms to consider whether they have an ‘excess surplus’ in a with-profits fund that should be distributed to policyholders.

The consultation will close on 3 September 2008 and a policy statement giving feedback on the consultation is due to be published before the end of the year.

Notes for editors

  1. Consultation Paper 08/11 'With-profits funds-compensation and redress' can be found on the FSA website.
  2. The FSA confirmed its intention to reconsult on compensation and redress costs in a letter to Ms Clare Spottiswoode, Policyholder Advocate and Mr Mark Hodges, Norwich Union Life chief executive sent on 6 December 2007.
  3. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
  4. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.