FSA demands fairer share for with-profits investors

Investors look set to get a fairer share of life assurers’ with-profits funds, or pay lower charges for moving their money out of them, under a crackdown announced by the Financial Services Authority.

Proposals to improve the distribution of “excess surplus funds” among with-profits policyholders, and limit the imposition of “market value reductions” (MVRs) on policies cashed in early, were announced by the City regulator on Thursday after a review carried out last year into how fairly providers were treating their customers.

But fund managers and financial advisers said any new rules would only accelerate the withdrawal of cash from these much-criticised investments.

According to the FSA, its review identified “a number of concerns about the way in which firms were operating their with-profits funds”, prompting the regulator to propose measures to give better protection for policyholders.

These include requiring all with-profits providers to have a plan to distribute any excess surplus fairly; ensuring that the sale of new policies has no adverse effect on existing investors; and restricting the circumstances under which firms can impose MVRs or exit charges.

Sheila Nicoll, FSA director of conduct policy, said: “Policyholders expect to receive a fair return on their investments and that is what we want firms to be able to deliver for them.”

However, Jeremy Mug­ridge, marketing manager of investment group Skandia, forecast that the proposals would hasten the demise of these products. “It looks like the scythe is falling nearer and nearer the neck of with-profits policies,” he said.

“It is heartening to see the regulator taking a serious look at the use of MVRs, which are a significant and deliberate obstacle used to deter with-profits policyholders from moving their money into investment vehicles better placed to meet their needs.”

AWD Chase de Vere, an independent advisory firm, said it supported the ­proposals and believed that a reduction in exit charges would result in more investors in poorly performing or closed with-profits funds taking their money out early.

With-profits funds are supposed to deliver a smoothing of investment returns from equities, bonds and property by holding back annual bonuses in good investment years to pay bonuses when markets do not perform well.

On the FSA’s most recent estimate, £330bn was held in such funds via pensions, mortgage endowments and bonds. But they have been widely criticised in recent years for a lack of transparency over investment performance and the freezing of bonuses for many policyholders.

Aviva, the UK’s largest insurance group, said it already operated its with-profits fund in line with many of the proposals outlined by the FSA.

“We have an established practice of assessing whether surpluses from the estate should be distributed,” it said.

Friends Provident said it hoped the proposals would benefit “both the consumer and the industry”.