The FSA has published its long-awaited feedback statement to the consultation paper, Treating With-Profits Customers Fairly, which was issued in December 2003. In general terms, the wait has been worthwhile as the FSA has signalled a further period of consultation on the detail of its proposals. From a product provider's perspective, a further period of consultation must be welcome. The original proposals had considerable scope for unintended consequences, to use the FSA's own phrase from the document. In this instance, these potentially included:
More with-profits funds being put into run-off.
Undue reduction in the value of shareholder interests in with-profits funds.
Damage to the viability of the traded endowment market.
Some mutual insurers (and here I must disclose Royal London Group's interest) also expressed concern that some proposals, in particular, those concerning the use of capital and distribution of all surpluses, would have the highly significant unintended consequence of forcing mutuals to close to new business. The consultation paper was explicit on an intended consequence of the proposals – a fundamental shift in the balance of expectations from policyholders who hold a product until maturity towards those who surrender early. To quote the paper: “We accept that our proposal on surrender values may have some adverse impact on with-profits policyholders who hold their policies until maturity.” But elsewhere the FSA accepted that low surrender values are not as prevalent as in the past. It is therefore good to see the consultation process working. It is clear from this latest feedback statement that the FSA has been in listening mode and the revisions strike a far better balance between the needs of consumers and those of with-profits providers and shareholders. Most of the unintended consequences have been addressed although the intended consequence of encouraging redistribution from maturing to surrendering policies remains.
It is heartening to see clear recognition of the fundamental difference between mutual and proprietary structures. There have been significant revisions to the original proposals that got the mutual sector so agitated. The FSA has made specific concessions to mutual structures, particularly surrounding the use of policyholder capital and distribution of surpluses. These will help to maintain a level playing field between mutuals and plcs.
The debate has been healthy throughout, with the FSA showing itself to be receptive to reasoned argument and willing to take a practical and pragmatic approach. This will lead to better regulation and healthier working relationships between the industry and its regulator.
Although the outcome of the consultation looks to be workable, this is not to say we should be satisfied with the process in itself. Although the consultation closed at the end of March, feedback was not forthcoming until August.
During this time, providers have been anticipating delivery by November of a consumer-friendly version of the Principles and Practices of Financial Management for each of their with-profits funds.
Anyone who has sat down to read one of the consumer-unfriendly versions that all providers published in April will not underestimate the effort required to convert one of these documents into something that policyholders have a chance of understanding. The November deadline has been looming large and lack of clarification from the FSA has been a cause for concern.
It is welcome that the FSA has now introduced some clarification – and a revised deadline, likely to be April 2005 – for what is expected in the consumer-friendly version of the PPFM. The debate around with-profits kicked off in spring 2001. In the following three-and-a-half years we have had five issues papers, seven consultation papers, three policy statements, two feedback statements and a discussion paper on with-profits. This is not to mention the Sandler review which looked at the structure of with-profits.
Positive engagement between industry and regulator must be a good thing but three-and-a-half years is a long time for with-profits to be under a suspended sentence.
It is perhaps not surprising that sales have declined during this period. IFAs are understandably cautious about recommending a product which has been under regulatory scrutiny for so long.
Let us hope the latest round of consultation will be the last for some time and that reformed with-profits products can once more assume a central role in financial planning.
Gareth Evans is head of corporate affairs at Royal London Group