FSA unveils plans to reform regulation of With-Profits funds

The proposals follow the regulators With-Profits Review, which was launched by FSA Chairman, Howard Davies in February 2001. Implementation will begin this summer.

Today, Howard Davies said:

"There will be a continuing demand for a long-term savings product that offers some of the features of with-profits in particular returns that are typically better than deposit rates, some protection from market volatility and some form of guaranteed minimum return.

However, many of the features that have allowed with-profits investments to deliver superior returns in the past are precisely the features that give rise to concerns about the lack of transparency and poor consumer understanding. So, reform will need to achieve an appropriate balance between the two.

Before they buy, policyholders need to know how their money will be invested, the risks associated with that investment and the likely benefits, both guaranteed and discretionary. After sale, they need to be kept informed of the progress of their investment. And they need to be confident that their interests are to the fore when directors are making decisions about the operation of the fund.

The reforms we propose will bring about that much-needed transparency and help significantly to rebuild confidence in with-profits funds.

The future of with-profits will now depend on the industrys response to addressing the concerns we have identified and the extent to which they respond to changing consumer needs. New types of smoothed equity-related savings products may emerge in the future. In taking our work forward, we will consider the findings of other relevant work underway, including the recommendations from the review of the medium and long-term retail savings industry currently being conducted by Ron Sandler.

But whatever the future of new business, the run-off period for existing business could well be 40 years or more. So there is a clear need to maintain a robust regulatory regime, for the benefit of both existing and future policyholders. That will be of considerable value to the many millions of policyholders whose financial welfare is bound up with funds constructed in this way."

The proposals set out a framework to give consumers:

• A better understanding of the way the with-profits fund in which they are invested is run;

• Greater confidence that they will be treated fairly. This may be achieved through firms setting up a With-Profits Fund Committee specifically to ensure that the interests of with-profits policyholders are taken into account;

• Clearer information, before sale on the nature and risks of their investment, and, after sale, on how it is performing;

• Improved access to clearer and more comparable information on the financial condition of companies and their with-profits funds, including the ability to meet discretionary payments such as terminal bonuses; and

• A more open and transparent process for ensuring that policyholders interests are represented when the re-attribution of an inherited estate is considered.

Among the proposals are:

• A requirement that firms define and publish the Principles and Practices of Financial Management that are applied in the management of with profits funds and to report annually to policyholders on their compliance with the principles and practices;

• Plans for a clearer and more directly comparable presentation of information on the solvency of with-profits funds and their ability to meet guaranteed benefits;

• A requirement for firms to provide new information to help assess their ability to meet guaranteed and discretionary bonuses, including terminal bonuses, at an individual fund level;

• Enhanced disclosure requirements, based on a tiered approach with core information available to all consumers and supplementary information available on request;

• Improvements to the information provided to customers after a product has been sold; and

• New guidance on a more open process for handling the re-attribution of inherited estates.

The full proposals are included in a Feedback Statement, published today. The FSA will need to consult formally on proposed rules changes so the ideas set out in the Feedback Paper will be taken forward in a number of consultation papers. The timetable for this is included in the Feedback Statement.

In addition, the FSA has today published a separate Feedback Statement on the future role of the actuaries in the governance of life insurers, which applies to all life insurers. The proposals set out on with-profits take account of the conclusions of that work.

The With-Profits Review forms a key part of the wider range of actions that the FSA has brought together under the Tiner Project. This is a major initiative to strengthen insurance regulation and the way in which the review contributes to this wider work is set out in the report on The future regulation of insurance published in December 2001.

A copy of the executive summary from the With Profits Review Feedback Statement accompanies this press release. The full Feedback Statement, together with that on the Future Role of Actuaries in the Governance of Life Insurers, is published on the FSAs web site www.fsa.gov.uk.

Notes for editors

1. In February 2001 the FSA announced that it would undertake a review of with-profits business, looking at:

   • the discretion available to management over the operation of with-profits funds and how that discretion is exercised;
     

   • how published information about with-profits funds might be made clearer;
     

   • how information to policyholders about the progress of their investments, including the language used to describe returns, might be improved; and
     

   • the principles which underpin the requirement for firms to have due regard to the interests of their customers and to treat them fairly.

2. In carrying out the review the FSA has sought input from a wide range of interested parties. It published an initial Discussion Paper, held an Open Meeting on 18 June 2001, met a wide range of interested external parties and conducted consumer research. Between October 2001 and February 2002, it published five Issues Papers covering the key themes under the review. These comprised: Process for dealing with attribution of inherited estates; Regulatory reporting; Disclosure to consumers; Discretion and fairness in with-profits policies; and Governance of with-profits funds and the future role of the appointed actuary,. It set up a Standing Panel as an external sounding board to test and help it develop its proposals. The panel included representatives from industry, consumer bodies, professional organisations, the Office of Fair Trading and the Financial Ombudsman Service.

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 of consumers; and fighting financial crime.

4. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.