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Treasury Committee slams FSA over inherited estates

The Treasury Select Committee has slammed the FSA for not providing a robust enough framework to manage the conflicts of interest in inherited estates.

The TSC investigated how well the FSA was protecting the interests of with-profits fund policyholders. It concluded conflicts of interest arise because shareholders control fund strategy and therefore stand to gain at the expense of policyholders from certain uses of inherited estates.

The report criticises the FSA for failing to develop clear principles for the regulation of inherited estates. It instead becomes embroiled in making judgements in the round and micro-regulating particular firms’ situations, according to the MPs.

Chairman John McFall says: “The approach taken by the FSA seems a long way from the philosophy of principles-based regulation to which it aspires. Policyholders need to have confidence that their interests are being protected, but the current oversight by the FSA gives no such assurance. Policyholders deserve a regulatory framework based on a clear set of principles and unambiguous guidance on how inherited estate can be used by life firms’ management.”

The report labels the charging of misselling compensation costs to inherited estates as inappropriate and claims the vast bulk of misselling costs should be borne by shareholders because it is their duty to ensure staff behave appropriately when selling products.

McFall says: “I was astonished that the Prudential had taken £1.6bn from their inherited estate to pay the costs of compensation arising from mis-selling. By reducing the size of the inherited estate in this way, the firm’s policyholders have a much lower chance of receiving a special distribution than they would have done otherwise.”

The TSC the funding of new business from inherited estates constitutes an intergenerational transfer from current policyholders to the future beneficiaries. The MPs claimed this recycling causes particular problems during reattributions because the future beneficiaries of this intergenerational transfer will be shareholders, who have discretion over both the strategy and portion of the inherited estate to be put aside for the funding of new business.

The report calls on the FSA to conduct rigorous assessment of the reasonableness of assumptions made by firms during reattribution negotiations, to ensure that they reflect the trend of the declining popularity of with-profits products.

The report also states firms should not be allowed to charge shareholder tax to inherited estates and has called on the regulator to consult on the issue by the end of 2008. It says this practice is a striking example of how certain life firms are able to use their discretion in a way that furthers shareholder interest to the detriment of policyholders.

McFall says: “Shareholder tax is another example of the FSA’s barmy regulation in this field. The FSA permits the charging of shareholder tax to the inherited estate if it is a firm’s established practice, but otherwise it is not allowed. Having different rules for different companies does not indicate to me that the FSA is taking principles-based regulation seriously. Either it is right, or it is wrong. It cannot be both.”


Structured thoughts

When economic times change, it always fascinates me to see how different areas of the financial services industry respond to meet the changing demands of clients and customers while also being sure to make a decent profit.

Domestic upheaval

The global growth open-ended sector is skewed heavily towards domestic markets but the same cannot be said these days of the equivalent closed-ended portfolios. The huge generalist, international and global growth funds have historically featured majority weightings in the UK.


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