The FSA's publication today of a letter to CEOs of insurers that provide with-profits funds is welcome says the Financial Services Consumer Panel but could go further.

Although the FSA's letter has highlighted the need for firms to consider the principles of good regulation in relation to governance arrangements and the run off plans for closed funds, the Panel believes that the FSA's interpretation of the rules on independent representation of policyholders interests is not strong enough, and there are other issues that need to be addressed to enable policyholders to have fair access to and understanding of their with-profits funds.

The Consumer Panel recently published research which questioned the current governance arrangements of with-profits funds. Although since 2004 the FSA requires an independent voice to represent policyholders, such as a with-profits committee, the Panel's research showed that 60% of these committees use directors of the main board of the company or individuals closely associated with the company, for example non-executive directors and former directors. Although this meets the current requirements, the Panel believes that this is not independent enough.

The Panel is calling for the following action from the FSA and industry:

• A truly independent with-profits committee seems to be the right mechanism for proprietary companies to achieve fair representation of policyholders’ interests. More research is required in this important area.
• At the moment companies can use their with-profits capital to fund new business development, pay shareholder tax and settle mis-selling claims. This needs to be reviewed;
• The FSA and industry should work together to provide some form of limited or focused advice on with-profits policies to policyholders. The Panel's research found around 8 million people can’t get essential advice about whether they should keep or transfer out of their closed with-profits policies because they can’t afford to pay for fee-based advice, while commission-based advisers are reluctant to take them on for fear of future reprisals from the FSA;
• • Communications from companies should not assume that policyholders have access to independent advice and should include all material facts written clearly so policyholders can understand and act on the information. The Panel's research showed that communications from with-profits companies often fail to set out options for policyholders clearly. There may be exit ‘penalties’ and even when ‘penalty-free’ exit dates are available, companies often fail to communicate these effectively to policyholders;
• The FSA should consider requiring companies to provide a simplified financial statement that sets out how it has used its with-profits fund over the past year.

John Howard, Chairman of the Financial Services Consumer Panel said:

"The FSA is making some progress in challenging companies to treat their with-profits policyholders fairly, but there is still some way to go. These are complicated products, and people need help to understand how to make the best investment decisions. This means having access to advice, receiving clear communications and being able to see that there is a truly independent voice to represent their interests when Board decisions are being taken. If this is not done, consumers will yet again be left with little confidence in this sector of the market."

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