Any liabilities arising from misselling complaints or other operational failures will have to be borne by shareholders rather than policyholders from July 31 onwards.
Under current rules, life offices can pay compensation out of the inherited estate of its with-profits fund but for policies sold after July 31 they will no longer be able to do this.
In June 2008, the FSA proposed they would change the rules for all payments made after 1 November 2008, regardless of when the misselling occurred.
In a consultation published in February this year, the FSA went back on the original proposal and set out plans to instead only apply the new rules to policies sold after July 2009.
Both Which? and Aviva policyholder advocate Clare Spottiswoode have been calling for a stop to this practice though they were calling for this to apply retrospectively rather than in the future.
Which? says there are now very few with-profits policies sold each year so the FSA’s proposals will have an extremely limited impact.
FSA director of retail policy and conduct risk Dan Waters says: “It is essential that with-profits policyholders are treated fairly.
“The changes we are confirming today are an important development in this regard, which seek to ensure that policyholders do not pay for costs resulting from management failings.
“In future, the liability for compensation and redress payments will rightly fall to shareholders as the owners of life companies.”
Which? chief executive, Peter Vicary-Smith, says: “This is an unbelievable betrayal of consumers who are taking hits from all sides. It appears the FSA is allowing the financial services industry to dictate policy once again.
“In the current environment it seems ludicrous that firms can raid with-profit funds to pay for their own regulatory failings. The FSA must stand up to this industry.”
An ABI spokesperson says: “The new rules are a considerable improvement on the FSA’s initial proposals. However, we continue to be concerned about the possible impact of these proposals for the relationship between shareholders and policyholders and we will keep a watching brief on this.”