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Has FSA done enough to shake up with-profits?

The FSA was once again at the heart of controversy last week with the publication of its much awaited plans for cleaning up the with-profits industry. Not surprisingly, the feedback paper evoked nearly as much criticism as it did applause.

Some have attacked the report for not going far enough, saying the proposed changes are simply window dressing rather than root reforms.

Then there are inevitably those who fear the FSA may have gone too far and is threatening the very existence of the industry.

But most providers and the ABI welcome the proposals, saying the FSA has hit the nail on the head in terms of addressing the problems in with-profits.

Many have said the proposals are directly related to the collapse of Equitable Life and this is quite easy to believe. After all, it was the UK&#39s oldest mutual life office&#39s decision to close its doors to new business that prompted the need to overhaul the with-profits industry.

What are the changes being proposed by the FSA? The majority have been floated by the regulator in the last year in a series of papers.

Disclosure will be enhan-ced, with firms required to publish what the FSA is calling the “principles and practices of financial management”. This has been interpreted by some providers to effectively mean a range within which returns will fall.

There will be pre-sale and post-sale disclosure in two forms – one an easy-to-understand version for the majority of consumers and a detailed version for IFAs and sophisticated consumers.

As part of the disclosure requirements, life offices will need to produce a “realistic” calculation of liabilities to give a better idea of current and future financial strength.

Another idea is the creation of a with-profits fund committee which will be responsible for looking after the interests of policyholders. The members could be non-executive directors on the main FSA board or other external non-directors.

The distribution of orphan assets is another area to come under the microscope, with proposals to develop an advocate to act on behalf of policyholders. The role has yet to be defined but it is thought they would negotiate with the life office and consumer groups to decide how to divvy up inherited estates.

There will be much more onus on the boards of with-profits life offices, including non-executive directors, making them responsible for the performance of their funds and how investors are treated.

Going hand in hand with this is a significant narrowing of the role, or at least that played out in public, of the appointed actuary.

The actuary will still be responsible for discretion in setting bonus rates and smoothing by life offices but the FSA believes its other measures aimed at constricting the importance of disclosure will reduce the influence of the actuary.

Appointed actuaries will be prevented from holding any senior management role or sitting on the board of life offices and boards will sign off the decisions made by the actuary.

FSA spokesman Rob McIvor says: “At the moment, all the decision making gets dumped on the actuary. There will still be a need for the actuary to do the number crunching but it will be the boards who must carry the burden.”

One proposal that seems to have been abandoned by the FSA is an external peer review of the actuary&#39s work. The FSA&#39s paper mentions a further consultation on this idea in the autumn but McIvor concedes that it is not high on the regulator&#39s priority list.

One provider has criticised the changes for not going far enough while another is worried that the reforms may sound the death knell for the industry. Skandia believes the FSA has missed the opportunity to truly ref-orm with-profits and is holding out for the outcome of the Sandler review, expected in July, as the last chance to tackle what it sees as the perceived problems.

Pensions marketing manager Peter Jordan says: “The FSA has gone to great lengths to find a way of preserving the status quo. The main thrust of the proposals seems to be to create a framework that improves the credibility of existing structures without driving through fundamental changes.”

But Britannic Retirement Solutions warns that the FSA&#39s proposals could potentially strangle with-profits out of existence, saying the regulator is ruining a savings concept which has always served customers rather well.

Hargreaves Lansdown bel-ieves the reforms will cut the size of the market as providers pull out rather than conform to the FSA&#39s reforms.

On the other side of the coin, both the ABI and leading life industry analyst Ned Cazalet have welcomed the chan-ges. The trade body was bound to be benign towards the ref-orms the with-profits giants are members of the body.

Cazalet sat on the FSA&#39s with-profits committee which came up with the proposals.

The Prudential, Norwich Union and Standard Life have also welcomed the plans, saying the reforms will make with-profits more easily understood by consumers.

Looking at recent ABI sales tables for with-profits bonds, perhaps it is not surprising that these three firms welcome the FSA&#39s moves. NU came first in the table with sales of £3.1bn in 2001, the Pru second with £2.2bn and Standard Life third with £1.4bn.

Baronworth Investment Services director Colin Jackson says: “I am surprised they have welcomed it because it appears to me that they are facing a massive amount of additional work.”

There is no denying they are facing changes but some firms such as Skandia say it is clear from the reaction of the big with-profits life offices that they feared something much worse.

Jordan says: “The joy with which the with-profits industry has greeted this statement must suggest that it has not gone as far as they feared.”

But the heaviest criticism came from the Consumers&#39 Association, which has opp-osed much to do with with-profits for a long time. It has attacked the FSA for being “naive and pathetic” for succumbing to the pressure exer-ted by with-profits industry.

CA senior policy adviser Mick McAteer says: “The with-profits insurance companies have been at the heart of every major financial scandal for the last two decades. The proposals have made little inroad to prevent such scandals happening again.”

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