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FSA issues Dear CEO with-profits warning to insurers

The FSA has sent a Dear CEO letter to insurers warning it has uncovered worrying practices in both open and closed with-profit funds involving the standards of governance and run-off plans.

The letter highlights practices the regulator observed as part of two reviews- one focusing on the governance arrangements of all with-profit funds and one on management of closed funds- that it believes fall short of its principles of treating customers fairly and effective management and control.

Problem areas include some providers’ arrangements for independent input not involving consideration of wider TCF issues, conflicts of interest in the way firms use independent reviewers to look at management of with-profit funds and a lack of timely information to those responsible for the independent review of the management of funds.

The FSA’s second review focused on closed funds and found the management of some closed funds had not devoted sufficient attention to managing the run-off of the fund.

FSA sector leader for insurance Sarah Wilson says: “Since the FSA’s introduction of new rules for with-profits funds in 2004 / 05, we have been monitoring individual firms’ compliance with the rules. The mixed picture shown in the reviews of two key areas is of concern. Some firms are not doing enough to provide independent input into the management of with-profits funds or are not devoting enough attention to running off closed funds.

“Senior management need to review our findings against their approach to managing their firm’s with-profits funds and take prompt action to address any shortcomings. We will continue to assess firms on these issues and will take action where we find that customers are not being treated fairly.”

The Financial Services Consumer Panel welcomed the letter but says the FSA could go further. It suggests the regulator’s interpretation of the rules on independent representation of policyholder interests is not strong enough.

FSCP chairman John Howard says: “The FSA is making some progress in challenging companies to treat their with-profits policyholders fairly, but there is still some way to go. These are complicated products, and people need help to understand how to make the best investment decisions.

“This means having access to advice, receiving clear communications and being able to see that there is a truly independent voice to represent their interests when Board decisions are being taken. If this is not done, consumers will yet again be left with little confidence in this sector of the market.”

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