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."

– ends –

MEDIA ENQUIRIES

1. The calculation of 8 million people disenfranchised from financial advice is an approximate minimum based on ‘small’ policyholders, which we define as those with policy values of less than £5,000.
   
   
   • An FSA May 07 post-sales report concluded that there are around 8m ex-industrial branch with profit policies still in force. (Note: it is important to distinguish between policies and policyholders, as some customers may have more than one policy.) IB policies, sold door-to-door in the past, tend to have a very low value and few of these customers would have multiple policies. A cautious assumption is 7m ex-IB policyholders.
     
     
   • The research concludes around 2.6m people used an 'appropriate' personal pension (APP) to contract out of Serps/S2P for a few years and then contracted back in, with a resulting with profit policy of around £5,000.In addition there will be low-value lapsed personal pensions – possibly 1.8m but some of these may be APPs
     
     
   • To avoid double-counting of policyholders, the total of 7m + 2.6m ex-industrial branch and APP customers has been reduced to 8 million.
     
     
2. policy value of £5,000 or less is considered ‘small’, particularly if there are no other assets to advise on and be remunerated. If an MVR is applied this would reduce the fund value and the commission further. Typical initial commission for a new unit linked policy is about 3%, and therefore worth £150 for a £5,000 transaction. Many policyholders have funds of £1,000 or less so commission for a sale would be about £30. Also, the commission is only paid if the (complex) with profits review process shows the customer would be better off transferring – if the customer stays put, the adviser receives no remuneration for the work.
   
   
3. The FSA established the independent Financial Services Consumer Panel in December 1998 to advise its Board on the interests and concerns of consumers and to report on the FSA’s performance in meeting its objectives. The Consumer Panel has statutory status.
   
   
4. The emphasis of the Panel’s work is on activities that are regulated by the FSA, although it may also look at the impact on consumers of activities outside but related to the FSA’s remit. More information about the Panel's work is available on this website.
   
   
5. The Consumer Panel brings together a wide range of relevant experience. This includes financial services regulation, working with vulnerable consumers, consumer protection, consumer education, front-line money advice, legal expertise, competition policy, public policy analysis, market research and media.
   
   
6. There are currently twelve members of the Panel as listed below (for further information on individual members, see the Panel's website – www.fs-cp.org.uk)

John Howard (Chairman)
Adam Phillips (Vice Chairman)
Kay Blair
Michael Chapman
Stephen Crampton
Caroline Gardner
Jenny Hamilton
Tony Hetherington
Nick Lord
David Metz
Lindsey Rogerson
Carol Stewart