The inquiry focused on how well the interests of with-profits fund policyholders were being protected by the FSA, particularly with regard to the distribution of the billions of pounds that has built up in with-profits funds, known as the “inherited estate“. These funds are in excess of what is needed to pay policyholders. Evidence was heard from the FSA, Aviva and Prudential about how life assurers should distribute such funds.
The report claimed conflicts of interest arise in inherited estates as shareholders, through the management of life assurance companies, control fund strategy and therefore stand to gain at the expense of policyholders from certain uses of inherited estate. It identified particular problems in using inherited estates to fund the cost of obtaining new business because money is effectively transferred from current policyholders to the future beneficiaries.
The Chairman of the Committee, John McFall MP said: “The approach taken by the FSA towards inherited estates seems a long way from the philosophy of ‘principles-based’ regulation to which it aspires. Policyholders need to have confidence that their interests are being protected, but the current oversight by the FSA gives no such assurance. Policyholders deserve a regulatory framework based on a clear set of principles and unambiguous guidance on how inherited estate can be used by life firms’ management“.
The report also criticised insurance companies for using funds to pay shareholder tax and concluded that the charging of mis-selling compensation costs to inherited estates was inappropriate.
Earlier this month, the FSA said that it was considering changes to bar insurers from paying clients compensation for mis-selling out of their inherited estate. With respect to the Committee’s report, it has confirmed that it is considering its findings and intends to formally respond “in due course“.
