The FSA has warned that other insurers may be forced to charge policyholders for guarantees in the same way that Standard Life is proposing to do.
The warning comes as the regulator made public a response to Liberal Democrat Treasury spokesman Vincent Cable.
Cable had written to FSA chief executive John Tiner, questioning whether the FSA had recommended Standard Life to demutualise, following recent announcements by the life office that it will conduct a strategic review and will no longer include the benefits of mutuality in its future projections.
In its response, the FSA states that while it has no view on the merits of mutuality one way or the other, it does add to consumer choice but can leave fewer options for capital-raising.
The open letter to Cable goes on to say it may be that “a number” of other insurers will adopt charges on guarantees as Standard is proposing, saying it believes that it is essential that capital is held to back guarantees. It says companies in other sectors of financial services already price such costs into products.
The FSA says: “Many life insurers, especially those heavily involved in selling smoothed with-profits policies, need considerable capital to back their business and a mutual has a different and sometimes more limited range of choice as to how to respond to any capital shortfall.”
Cable says: “At first sight, this does spell the end of the mutuality sector. What does worry me is that the directors may be promoting demutualisation. On one side, Standard has the FSA pushing it towards demutualising but the City indicating it should move in the other direction, with Moody's and Standard & Poor's downgrading it.”
Scottish Widows head of industry relations George Andrew says: “We are not looking to adopt the same charging approach. We operate on the basis that amounts are reserved in years when guarantees are not biting for years when they are.”