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Tougher rules on using future profits in reports

The FSA is cracking down on the financial reporting of life offices

by making it harder for them to use future profits when valuing their

long-term liabilities.

The regulator sets out its plans as part of consultation paper 123,

which aims to force providers to use accounting techniques which

ensure their assets and liabilities are valued realistically and that

capital requirements reflect the real risk they face.

The move is being seen as an attempt to prevent another Equitable

Life disaster and has been welcomed by industry experts, who say the

accounting practices of some providers are open to question.

The FSA wants life companies to follow rules in its integrated

prudential sourcebook, which aim to increase the transparency of the

process and makes it harder for life offices to include future

profits in their solvency calculations.

Under the rules, firms seeking to use future profits must prove to

the FSA that their use does not pose a risk to consumers or face

being turned down for a special waiver.

Cazalet Financial Consulting principal Ned Cazalet says: “It tends to

be the weaker life offices which use this method and it has been

abused in the past.”

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