FSA consults again on its proposals for treating with-profits policyholders fairly

CP207 included proposed rules and guidance on payouts, surrender values, market value reductions, closed funds and the process for reattribution of inherited estates. Today's paper includes revised proposals for consultation on aspects of treating policyholders fairly and the provision of information to consumers, together with near-final rules for the reattribution of estates.

David Strachan, the FSA's Sector Leader for Insurance, said:

"We are making important changes to the way that we will achieve our objectives for ensuring that with-profits policyholders are treated fairly, in the light of responses to our consultation. The proposed changes should not diminish the protection that policyholders will gain from the new requirements.

"This is a key area of new policy and we are committed to getting the final rules right. We are therefore consulting again on revised proposals, in order to give our stakeholders the chance to study, and comment on, the changes. This demonstrates our desire to work with our stakeholders to develop rules that are practical, yet meet our objectives.

"Our determination to ensure a fair deal for consumers is underlined by the extensive research that we have carried out to develop new information to be made available to consumers on with-profits policies. This will result in firms providing information that will help consumers to understand better how with-profits funds work and to decide whether this particular product will, or continues to, meet their needs."

The revised proposals contain a number of changes to the CP207 draft rules on treating with-profits policyholders fairly. These include:

• firms may set target ranges for payouts by reference to unsmoothed asset shares calculated either for individual policies or for representative specimen policies;

• firms will not be required to set a target limiting changes in payout levels from one year to the next. Instead, they must have a clearly articulated smoothing policy; and
  

• any firms with capital in excess of their current and future business needs can consider a reattribution of surplus as an alternative to a distribution of surplus to policyholders.

Since the publication of CP207, the FSA has carried out detailed research on its proposals for providing information about with-profits policies to policyholders and potential purchasers of policies. The research showed that a consumer friendly version of firms' Principles and Practices of Financial Management (CFPPFM) would help increase consumer understanding of with-profits policies. When the new rules are implemented, firms will be required to send CFPPFMs to all existing and potential with-profits policyholders, including those in closed funds. These should be expressed in clear, plain and easily understood language. The revised proposals include guidance to firms on the presentation of their CFPPFMs.

CP207 contained a number of proposed protections for policyholders in closed with-profits funds. In particular, it included provisions detailing the information that should be provided to policyholders in the event of a fund closing to new business. These proposed rules have remained broadly unchanged and, once implemented, will ensure that policyholders in funds that close to new business are better able to assess whether the policy will continue to meet their needs, the options open to them and the impact of closure on future bonus payments.

Notes for editors

1. Today's further consultation, CP04/14: Treating with-profits policyholders fairly Further consultation is available here on our website. On the same page you can also find the earlier consultation, CP207: Treating with-profits policyholders fairly, which was published in December 2003.

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 and policy statements can be found here.

3. The consultation paper contains a mixture of draft Handbook text and near-final text. The proposals for treating with-profits policyholders fairly are being consulted upon, with a closing date for the consultation of 15 November 2004.

4. We are consulting on the timing of the introduction of the new rules. We propose that they should come into force four months after we issue the policy statement on the results of this consultation.

5. The paper contains near-final text for the rules governing the process for the reattribution of inherited estates. These confirm that a policyholder advocate must be appointed to negotiate on behalf of policyholders. If a firm were to propose a re-attribution before these rules come into force, we would consider with the firm whether they had been taken into account in its plans.

6. The full results of our research into CFPPFMs will shortly be published on our website.

7. 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.

8. In July 2004 the FSA published a paper entitled Treating Customers Fairly. This reviews the progress firms across all sectors have made in implementing the FSA principle requiring the fair treatment by firms of their customers and considers the next steps to build on improvements made and to address shortcomings.

9. 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.

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