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Clearer form book could handicap with-profits favourites

The slow lifting of the shroud of secrecy surrounding with-profits is going to transform the way it is sold, according to many in the industry. The FSA&#39s recent proposals will bring greater transparency but will also increase the responsibilities of IFAs selling with-profits policies.

“With-profits used to be sold as a generic investment animal. Now, IFAs will have to provide investors with much more information and it will be like selling an Oeic or Isa,” says Clerical Medical marketing manager Adrian Smith.

Given the enormous sums invested in with-profits and its continuing popularity, many have pointed out that abolishing with-profits would cause economic turmoil. So the FSA&#39s proposals are aimed at making providers more accountable to investors. Consultation begins later this year.

Aifa director of policy Fay Goddard believes that selecting the right provider will become even more crucial. In addition to the current data from sources such as ratings agency Standard & Poor&#39s, other tools could become available to assist IFAs. Aifa is in discussions with analyst Ned Cazalet to make his financial strength ratings of life companies accessible to IFAs in a simplified and affordable format.

Many in the industry believe that the reforms could lead to a reshaping of the market as investors become more aware of the precise nature of the fund they are buying into and the company offering it.

Last year, over £15bn was invested in with-profits bonds, with Norwich Union and Prudential taking the lion&#39s share of the market, followed by Standard Life and Legal & General. According to confidential ABI figures, the top four took over half the market, with a collective total of £7.8bn.

Following the FSA&#39s proposals, Clerical Medical has been quick off the blocks, launching an ad campaign to promote the way in which its with-profits fund works and highlighting that it is ringfenced so that shareholders do not get 10 per cent of policyholder profits – their slice comes out of an annual charge instead.

Scottish Equitable&#39s fund works on a similar basis. Head of public affairs Scott White points out that transparency could be awkward for mutuals as well as proprietary companies with 90/10 funds. He says: “The mutuals will have to learn the transparency that plcs are obliged to have.”

Mutual providers could be pushed into disclosing commercially sensitive information. The other prospect is that ringfencing could be enforced on with-profits funds as a result of the Sandler report. This, in turn, could place restrictions on the way that mutuals finance new business.

Companies finding it difficult to adhere to the openness required by the new regime because of antiquated systems or the cost of new marketing initiatives could find themselves open to suspicion. Likewise, as IFAs consider the underlying financial strength of life companies and the validity of their commercial strategies, the current favourites could be replaced.

IFAs will be well placed to make informed decisions about, for example, the profitability of stakeholder and the impact this could have on a particular life company. IFAs will also be able to look at what liabilities there are and how guarantees have been managed.

Some see these market forces bringing the reform of with-profits to a natural conclusion. Consumers&#39 Association senior policy adviser Mick McAteer said last week that it is up to IFAs to finish off a job left half-done by the FSA by selecting the best and punishing the worst providers.

Hargreaves Lansdown pension research manager Tom McPhail accepts that selling with-profits will become a much more significant and lengthy process.

Peering under the creaking bonnets of with-profits funds has already shown significant differences between providers, says McPhail. Unsurprisingly, the two critically ill patients of the industry, Equitable Life and Royal & Sun Alliance, have significantly less invested in equities than companies still open to new business. Equitable has 25 per cent and R&SA 39 per cent in equities.

Scottish Equitable&#39s with-profits fund, on the other hand, has an equity exposure of just under 80 per cent. Legal & General has around 60 per cent in equities.

While life companies have gradually disclosed their asset mix, underlying investment performance has been more contentious. L&G, unlike other major providers, has refused to provide this information until the FSA has reported on precisely how companies are required to do this.

The current FSA proposals are unlikely to be the end of the matter. Standing alongside the criticism from many sources that the FSA&#39s recommendations are too anaemic, there is the wide anticipation that Sandler&#39s review will delve deeply into the subject of with-profits.

Ominously, the area of commission and remuneration has been omitted from the FSA&#39s review and this is likely to be an area of future change.

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