FSA issues new proposals for the fair treatment of with-profits policyholders

"With-profits policies, which smooth returns, can have substantial benefits for policyholders, but they also have some specific characteristics, such as the large amount of discretion that firms retain over decisions, which can expose policyholders to unfairness. Todays proposals are about putting policyholders in a position where they can be more confident that their interests are being given fair consideration.

The proposals capitalise on existing good practices and deliver responsible reform so that consumers have confidence in the future of with-profits policies. Such confidence is critical to the future of the sector, and as such these are very important issues for policyholders and the industry alike. We hope that both groups will engage constructively in the consultation process, and while we have made clear our objectives, we are as always ready to debate how best to achieve them."

These proposals, which are key to ensuring that with-profits policyholders are treated fairly, will introduce requirements including:

• published target ranges for payouts. These cover a whole range of issues such as setting targets and aiming for payouts not to vary more than a certain percentage from those for other similar policies in the previous financial year (more detail in the notes to editors);

• that market value reductions (MVRs) should only be applied either if there has been a significant change in the value of the fund's assets or if a high volume of surrenders has occurred or is expected;

• restrictions on what firms can charge to their with-profits fund. These only allow costs that are directly connected to the operation of the fund;

• that compensation for with-profits policyholders to be paid first from any inherited estate and second from shareholders funds;

• on distribution of surplus. Firms would have to consider whether the surplus exceeds what is necessary to support current and future business. If it does, then this points in favour of a distribution; and

• notifying policyholders within 28 days of a fund closure and submit a run-off plan to the FSA.

Under the proposals, insurance firms would also be required to give with-profits policyholders key information in clear and plain language on how their funds are run. The FSA will be road testing sample information with consumers to see whether this is an effective way of improving consumer understanding of with-profits products.

The consultation paper also includes proposals on how to make sure that with-profits policyholders are treated fairly during the process of reattribution of inherited estates. The key proposal here is the introduction of a policyholder advocate an independent person who would negotiate on behalf of with-profits policyholders.

Lastly, the consultation paper also provides feedback on putting into practice the Sandler Review recommendations on with-profits. At present, the FSA is not minded to pursue the recommendation that all new with-profits business should be required to conform to the model suggested by Ron Sandler. Although in broad agreement with the concerns and issues raised in his report, the FSA feels that these have been largely addressed in the range of reforms already proposed for the with-profits industry including those set out above. This decision has no impact on the continuing consumer testing of the simplified sales process for stakeholder products, on which will be the subject of a separate announcement soon.

The deadline for comments is 31 March 2004.

Notes for editors

1. CP 207 can be accessed here.

2. The FSA started its review of with-profits regulation in spring 2001. The initial review consisted of five issues papers, followed by a feedback statement in May 2002 with proposals for changes in the regulation of with-profits business. All publications relating to the with-profits review including subsequent consultation papers can be accessed here.

3. The proposals on target setting for payouts are for firms to:

   • to set target ranges relating to the level of payouts that they make to policyholders when policies mature or are surrendered;

   • to manage their business with the aim that policy values are within a specified target range of the policy's unsmoothed asset share in the fund;

   • to ensure that amounts paid out did not vary more than a certain percentage, within the target range, from payouts for similar policies in the preceding year.

4. The inherited estate is the expression used to describe surplus assets in the with-profits fund. The estate has often built up over many years and forms part of the capital supporting the business. If part of the estate is distributed, part of the surplus may be allocated to policyholders and the amount they will get is often defined in the company's articles or by established practice. However, sometimes, a firm might want to change that practice and in effect buy out the rights or expectations of policyholders to a future share of the estate. This is known as reattribution. A reattribution may often be part of a wider restructuring of the with-profits fund.

5. 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.

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