The FSA's briefing on closed with-profits funds highlights the dilemma facing the ind-ustry over how best to deal with clients who have money inves-ted in these products.
The regulator is keen to stress that a closed with-profits fund is not necessarily a bad one and is clearly looking to nip any future scandal in the bud.
Sector leader for insurance David Strachan says the issue of closed funds remains high on the regulator's list of priorities as it looks to restore confidence in long-term savings products.
He says: “A catalogue of charges have been laid at the industry's door and there is a real danger that closed life funds will become the latest albatross to hang from the industry's neck. The issue has got very broad implic-ations and is capable of affecting the reputation of the industry. There is also a perception that the FSA is powerless to do anything, leaving policyholders exposed.”
Strachan stressed that he expects charges on closed funds to fall as the cost of new business acquisition is no longer an issue.
Closed life fund consolidator Capita says says if the regulator is too heavy-handed with its with-profits rulebook, which is due to come into force in the middle of next year, it will deter those looking to buy closed books.
Director Steve Parkinson says: “The FSA is looking to ensure that there is equality between what policyholders receive as benefit from the sales and what shareholders receive. They want to be sure that if there are cost reductions, they do not all just flow through the shareholders.”
He says: “My guess is that the FSA will impose more oner-ous requirements to ensure that the benefits of any cost cutting is equitably shared bet-ween policyholders and shareholders, as it should be.”
The FSA is also setting up an information campaign which it hopes will stem the “one-sided” reporting of the prospects for closed withprofits funds.
This includes the requirement that life offices with closed books provide principles and practices of financial management not only for advisers but also a consumer-friendly version for policyholders to give them a better understanding of the funds' run-off policy, including its investment strategy, asset mix and liabilities.
These will be sent out to the hundreds of thousands of policyholders who have a combined £191bn spread across the 66 closed with-profits funds.
Parkinson is keen to stress that broad generalisations are at best misleading and that policyholders in closed funds should not necessarily surrender their policies.
He says people who have invested recently in with-profits policies may well be best served by encashing their holdings but investors a year or two away from locking in bonuses could well be better off staying put and, as such, better information is needed to enable consumers and advisers to make more suitable choices. Market value reduction spot dates should also be better advertised.
How the asset mix and liabilities in closed with-profits funds are managed is, of course, crucial when deciding whether to sell and IFAs have welcomed the FSA's moves to ensure that policyholders and advisers are better informed.
Hargreaves Lansdown head of pensions research Tom McPhail says it is understandable that the FSA is keen to rebuild the tarnished image of with-profits but he remains wary of closed withprofits funds.
He says: “One should be cautious about making sweeping generalisations but closed funds typically tend to deliver poor performance and offer poorer performance moving forward. In recent years, closed funds have tended to raise greater concern and in some cases, funds have been closed because the life office is coming under solvency pressure.”
Closed fund consolidators such as Resolution Life, which recently bought Royal & Sun Alliance's £1bn closed book, believe they can breathe new life into the sector by improving performance and reducing costs through scale.
Resolution Life chief executive Clive Cowdrey stresses that decent performance can be extracted from closed books through individual policy mat-ching but most providers lack the systems in place to run this. He says: “In most cases, it is possible to work towards individual policy matching. Weak funds can leave people with ins-ufficient equity exposure but we want to give higher proportions of growth assets to those who will benefit most and higher fixed-interest quotients for those policies close to maturity.”
Cowdrey says some fixed costs such as compliance are difficult to reduce but others such as admin can be brought down by outsourcing aspects of the business, including fund management, to third-party specialists, lead to a reversal of the previous decades' overcapacity and a return to fewer specialist providers.
Strachan says the FSA is keeping a watchful eye on the costs of closed funds as part of its drive to ensure that policyholders are being treated fairly. He says the regulator will be better able to monitor both the performance and charging structure of closed with-profits funds when the new regulations and their more detailed information requirements come into force next year.
That said, those in the closed with-profits sector are expecting further consolidation in the coming years.