Consumer groups hit out at lack of tough approach by regulator over unfairness in the with profits sector

News - Funds

Written by Ray Clancy

Wednesday, 30 June 2010 11:00

With profits policy holders in the UK are still not being treated fairly with financial firms failing to stick to the rules which urgently need to be supervised more efficiently, it is claimed.

Consumer groups are furious that the Financial Services Authority review of the sector shows that rules are inadequate and are calling for the regulatory body to be more forceful with the worst offenders.

‘We are seriously concerned that, although the FSA introduced the current regime for with profits in 2005, this report shows that policyholders are still not being treated fairly by the FSA’s own measures,’ said Adam Phillips, chairman of the Financial Services Consumer Panel.

The Consumer Panel published a report in 2007 which highlighted problems in the governance of with profits funds and the way firms communicate with policy holders. ‘This review confirms that significant problems still exist, despite previous warnings from the FSA. There are 25 million with profits policies currently being used for pensions and other savings. It is totally unacceptable that firms’ failure to play by the rules is still potentially exposing substantial numbers of consumers to risk,’ he added.

The FSA has announced a further consultation at the end of the year and has promised to enforces investigations against the worst offenders but more is needed, according to consumer champion Which? ‘Despite reviews dating back as far as 2001, the FSA has continually failed to look out for the interests of with profits policy holders. It effectively looked the other way when Prudential, AXA and then Aviva plundered the inherited estates of their with profits funds and failed to act despite criticism from Which? and the Treasury Select Committee,’ said chief executive, Peter Vicary-Smith.

‘The FSA must name the firms that it is referring to enforcement and set in place rules that will ensure fair treatment for with profits policyholders,’ he added.

The FSA review focused on whether firms are treating their with profits policyholders fairly, looking specifically at how senior management in firms have implemented FSA rules. It admitted that ‘a significant number of firms are not adequately demonstrating the practices the FSA expects from a well run with profits business’.

IN its review the FSA said that there are two main areas of concern are: ineffective governance of with profit funds, especially in how independent challenge is provided by firms' with-profits committees, which means that policyholders' interests may not be properly protected; and significant weaknesses in the quality of consumer literature.

‘The FSA is not satisfied that all firms are doing enough to ensure that policyholders receive sufficiently comprehensive, timely and clear information to help them understand their policies,’ its report said.

The FSA said firms have been told to take action quickly to improve their operations including being directed to make immediate changes to their governance arrangements to better protect policyholders’ interests and two firms have been referred to the FSA’s enforcement division for further investigation.

‘The review showed that some aspects of the rules around with-profits could be further strengthened to provide greater protection for policyholders. This will be the subject of further policy work and the FSA will set out any proposed changes in a consultation paper by the end of 2010,’ the report said.

‘This review shows that, while there has been some progress, there is still more work to be done by firms in the with profits sector to make sure that their policyholders are treated fairly. We expect all firms to raise their game in this area, not just the firms that we reviewed,’ said Ken Hogg, FSA insurance sector director at the FSA.