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FSA proposes ban on insurers paying misselling claims from inherited estate

An FSA consultation paper is proposing insurance companies no longer be allowed to charge compensation for misselling to the inherited estates of with-profits funds.

The consultation paper proposals published today relate specifically to proprietary firms and not mutuals.

FSA rules currently allow firms to pay the costs of compensation and redress from the inherited estates of their with-profits funds, but the FSA says it has re-examined these rules and believes there is a need to consult on whether shareholders alone should meet the cost of compensation and redress.

It is seeking feedback on whether or not the current rules may lead to the unfair treatment of policyholders.

The inherited estate is the part of the with-profits fund that is judged to be surplus to what is needed to meet the fund’s liabilities.

It is retained as working capital by firms, but may in future be distributable to policyholders.

Inherited estates have built up over the years from different sources including premiums from past generations of policyholders and past capital injections from shareholders.

The FSA’s rules already require firms to consider whether they have an excess surplus in a with-profits fund that should be distributed to policyholders.

The consultation will close on 3 September 2008 and a policy statement giving feedback on the consultation is due to be published before the end of the year.

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