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FSA’s WP crackdown could hit smaller firms

The FSA’s proposed clampdown on insurance firms writing new with-profits business could lead to the closure of smaller insurers, according to the Association of Financial Mutuals.

Last week, the FSA proposed rules that will mean providers wanting to use capital in with-profits funds to write new business will have to demonstrate it will not erode the value of the fund or cause consumer detriment.

AFM chief executive Martin Shaw says: “The proposals could hasten the closure of mutual and smaller organisations and cause bigger mutuals to reconsider their status. For mutuals, the only source of capital is the money in the with-profits fund, while firms like Aviva have shareholder funds providing the capital.”

The FSA says “a substantial minority” of firms write new business in their with-profit fund that is loss-leading and will not break even, reducing the amount of money available to distribute to policyholders.

Shaw says firms use money resulting from intergenerational transfer that does not relate to current policyholders to back new business and it would be fundamentally wrong to pay that out to policyholders.

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