Around 8 million¹ 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.

This is one of the main conclusions from the Financial Services Consumer Panel’s report entitled “Are customers in closed life funds being treated fairly?”² Other areas of concern focus on delays that customers and advisers experience when they request information, incomprehensible documents and the lack of a truly independent voice to represent policyholders’ interests in the management of funds.

Many closed funds have performed quite well, but as funds close or approach closure to new business, policyholders need advice on whether to stay or move to another investment. The report found that advisers may be reluctant to take on these policyholders because their policy values are too small¹ to generate a worthwhile commission in return for the complex review process required. Moreover, they fear that advice on such complex products may trigger potential misselling claims.

The report also says that communications from with-profits companies often fail to set out options for policyholders clearly. There may be exit ‘penalties’³ and even when ‘penalty-free’ exit dates are available, companies often fail to communicate these effectively to policyholders.

There is a particular concern that proprietary companies⁴ running closed with-profit funds may not always act in the best interests of their policyholders. 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 have no independent members but use directors of the main board of the company or individuals closely associated with the company, for example non-executive directors and former directors. The Panel would like to see these committees with a majority of members entirely independent of the board.

The report also questions whether the with-profits fund is always being used in the best interests of policyholders. The research found that companies could use this capital to fund new business development, pay shareholder tax and settle mis-selling claims.

The Consumer Panel has sent its research to the FSA and relevant trade associations to urge them to do more to help policyholders, as many of the actions taken by companies running closed with-profits funds do not appear to fit with the FSA's principle of Treating Customers Fairly.

The Panel is calling for the following action:

• On the provision of advice, the FSA and industry should work together to provide some form of limited or focused advice on with-profits policies through companies or trade associations assisted by life companies. They could also provide with-profits review tools on their websites for advisers to use;
• 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;
• 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;
• The with-profits committee's should do more to encompass the whole of treating customers fairly principles for policy-holders and not just the Principles and Practices of Financial Management (PPFM) document, which is written by the management of the company;
• The FSA should consider requiring companies to provide a simplified financial statement that sets out how it has used policyholder capital over the past year.

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

"These are complicated products that consumers had little chance of understanding. Despite the work done by the FSA to regulate this sector, many consumers remain suspicious and worried. The information sent out by firms is too often incomprehensible and it is almost impossible for most people to get advice about their policy. Consumers feel locked into these products by what, understandably, they regard as penalty charges, and the so-called ‘independent’ committees meant to protect consumers are often packed with company men. Not surprisingly the closure and sale of with profits funds even though some have performed well has been accompanied by a rising tide of consumer discontent. "

^1.See notes to editors 1 and 2 for statistical background

^2. "Are customers in closed life funds being treated fairly?" Report for the FSCP, prepared by The Pensions Institute, Cass Business School and IFF Research Ltd.

^3.The ‘market value reduction’ (MVR) reduces the ‘face’ value of the policy to the value of the ‘asset share’ where this is lower.

^4.Companies with shareholders, as opposed to mutuals, which are owned by members.

– 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. A policy value of £5,000 or less is considered ‘small’, particularly if there are no other assets on which the adviser can advise 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. Importantly, the commission is only paid if the (complex) with profits review process reveals that 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.

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