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FSA plots stricter regulation on with-profits MVR charges

The FSA has moved to prevent with-profits providers from charging a market value reduction if they suffer liquidity problems as a result of members leaving the fund.

Under previous rules, providers were allowed to levy an MVR if their cashflow was hit by large numbers of members leaving a with-profits fund.

Under revised rules, published last week, the FSA confirmed these regulations will be strengthened to protect existing policyholders.

An FSA spokesman says: “Under the revised rules, providers cannot retain an MVR if too many people are leaving the fund but they can if people leave during folding markets and are walking off with more than their fair asset share. That is to protect existing policyholders.

“Under the old rules, you could apply an MVR under both. We are now saying the liquidity of the fund is an issue for the firm to manage.”

The policy statement says: “Those who remain invested in the fund and have their interests protected by the MVR do not necessarily appreciate the benefit they receive.

“However, we accept them as a reasonable means of maintaining fairness between different groups of policyholders when applied properly.

“They essentially reduce or suspend ’upwards smoothing’ of payouts when the fund cannot afford to continue making payments of more than the policy’s fair share of the underlying assets.

“The proposal to remove the ability of firms to impose an MVR on the basis of liquidity risks alone was welcomed by consumer organisations and there was little dissent from firms.”

AWD Chase de Vere head of communications Patrick Connolly says: “Investors and advisers have been concerned MVRs are being applied when there is no strong rationale so it is positive the FSA is looking to ensure they are only applied in the right circumstances.”

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