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A consumer&#39s view

The FSA&#39s review of with-profits is a damp squib, a missed opportunity and has been described by the Consumers&#39 Association as “naive and pathetic”. Many observers may think this is the understatement of the year.

Howard Davies, the chief executive of the FSA who conducted the review, has failed to deal with most of the fundamental problems which are:

•To clarify to whom withprofits assets really belong.

•To lay down guidelines or restrict actuaries&#39 total discretion.

•To define “policyholders&#39 reasonable expectations”.

•To prevent the management and actuaries from raiding the with-profits funds whenever they feel like it.

About the most profound comment he has to make on the subject is that “there will be a continuing demand for a long-term savings product that offers some of the features of with-profits – in particular, returns that are typically better than deposit rates, some protection from market volatility and some form of minimum guaranteed return. The reforms we propose will bring about that much needed transparency and help significantly to rebuild confidence in with-profits funds.”

He is right about the former but wrong about the latter. With-profits products, until the Equitable Life deb-acle, have served savers well. Indeed, it is arguable that with-profits plans are the only worthwhile products that the life industry has left to sell, apart from straight protection.

Who needs unit-linked life products when you can buy a straight unit trust with much greater flexibility lower charges? But he is wrong to presume that the proposed reforms will restore confidence in with-profits. They are little more than tinkering.

What the FSA has totally failed to do is ringfence the with-profits fund to prevent the management using this money to pay hefty bonuses to shareholders out of the “orphan assets” or appropriate these funds to pay for their mistakes.

We have seen time and time again how fat cat takeover merchants have raided the with-profits orphan assets of the target life company and distributed this money – which quite definitely belongs to policyholders – to pay handsome dividends to shareholders. The Axa Equity & Law distribution was the latest example of this form of asset-stripping but it was simply rubberstamped by the FSA.

Perhaps the worst and most blatant example of this “theft” of policyholders&#39 money was the takeover of Pearl. AMP took over Pearl for £1.2bn, secure in the knowledge that it could raid the £900m orphan assets to pay for the takeover. In effect, AMP used Pearl&#39s own money to effect the takeover.

The FSA review says firms must define and publish the principles and practices of financial management that are applied in the management of with-profits funds and to report annually to policyholders on their compliance with these principles.

How is this going to improve things unless it defines the limit of the actuary&#39s discretion or forces the company to stick to its bonus policy?

Life companies are required to explain their bonus policy to would-be with-profits policyholders but it has not stopped them manipulating figures and using them as sales material to create false expectations – or slashing bonuses dramatically when it suits.

The proposals fail to address the ongoing confusion surrounding policyholders&#39 reasonable expectations and the fact that this basic concept, enshrined in with-profits policies, has never been defined.

The proposal to set up a with-profits fund committee specifically to ensure that the interests of with-profits policyholders are taken into acc-ount is a step in the right direction but still does not deal with the fundamental problem – to whom does the with-profits fund belong?

What is needed is a root and branch reform of with-profits – and life company accounting in general – if confidence is to be restored.

This review is simply more of the same red tape and fails to deal with the fundamental problems.

The only hope now is that Ron Sandler will have more courage in dealing with the powerful actuaries lobby which has, quite clearly, once again pulled the wool over the regulator&#39s eyes.

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