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Reprieve for mutuals in FSA orphan U-turn

Mutuals have won a reprieve from proposals that could have spelt the end of the sector by preventing them from using orphan assets from with-profits funds to support new business ventures.

The FSA&#39s proposals for the fair treatment of with-profits policyholders – published last week in CP207 – allow mutuals to use orphan assets to grow new business.

This reverses the policy put forward in DP20 last spring.

Mutuals had complained that the proposals in DP20 – based on the conclusions of the Sandler review – could have forced them to demutualise to raise capital or quit the market.

They argued that the measures could have stopped the creation of new businesses such as Royal London&#39s Bright Grey, Standard Life Bank and Standard Life Healthcare.

The DP20 proposals would also have restricted the cash available to non-mutual life offices for investing in new ventures, including IFAs and other intermediary channels.

The FSA says investment in new business ventures will be allowed, provided that detailed information justifying the investment is given in the with-profits policy&#39s principles and practices of financial management statement.

Providers must give policyholders a written explanation of the business case for using their funds to invest in IFAs.

Royal London head of external communications and research Gareth Evans says: “If DP20 had been enacted, it would have spelt the end of the mutual sector. They have consulted on Sandler&#39s proposals and seen they are not as easily implemented as they seemed at first. The new rules may constrain the flow of capital for those life companies putting cash injections into IFAs.”

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