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FSA plans to ban orphan cash being used to pay for misselling

Advisers have welcomed an FSA proposal to ban insurers from using with-profits inherited estates to pay misselling claims.

The move was outlined in an FSA consultation paper published this week and could see an end to the current practice of product providers paying misselling compensation out of their inherited estates.

The Association of British Insurers has hit out at the proposals, suggesting that the FSA “seems to have made up its mind before completing its own consultation”. It says measures to include retrospective misselling complaints were not included in initial discussions.

Prudential recently revealed it paid out £1.6bn from its £9bn inherited estate to fund misselling compensation.

Norwich Union has confirmed that it has paid out £200m from its £5.5bn inherited estate to pay endowment complaints. The proposals will not affect payments that have already been made.

Norwich Union spokesman David Ross says: “The way that with-profits operate, with a 90/10 distribution of benefits between policyholders and shareholders, it seems reasonable that any costs should also be met on this basis.”

Norwich Union policyholder advocate Clare Spottiswoode says: “I hope that the consultation will end this provision which allows the erosion of the inherited estate to the detriment of policyholders.”

But she says she is disappointed there is no consultation on using the estates to subsidise new business or paying shareholders’ tax.

Highclere Financial Services partner Alan Lakey says: “If a firm has breached the rules, the policyholders should not be directly penalised in this way.”

Prudential refused to comment on the issue.

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