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FSA guidance on accounting for windfalls when paying compensation

The FSA has published guidance on how firms calculating compensation payments should treat windfall payments following the Needler court judgement in July 2001.

The FSA says the judgement has implications for pensions and FSAVC review compensation cases as firms are no longer allowed to deduct the value of the windfalls paid as top-ups from any compensation payable. It also affects mortgage endowment complaint cases.

The guidance says windfalls paid as shares will be valued at the issue price, not the market price at the time compensation is calculated, and windfalls paid as cash will be valued as the amount received.

Also windfalls paid as policy top-ups will be valued in line with principles set out in the policy statement. If a firm cannot work out the value accurately using these principles, then it can use a simplified or proxy approach.

To protect customers, the FSA says a firm should have its appointed actuary certify the windfall benefit has been valued in line with the principles in the guidance.

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