Discussion pAPER sets out plans for COMPULSORY INFORMATION DISCLOSURE, with aim of making policies more intelligible and trANSPARent
Scottish Widows is wary of a compulsory information disclosure recommendation the FSA is considering applying to with-profits funds.
If adopted, funds would be required to disclose smoothing accounts used to subsidise returns during difficult market conditions and cut back returns in better times.
The transparency proposal is in an FSA discussion paper on creating a with-profits operational model, aimed at making funds more intelligible to long-term savers.
George Andrew, Scottish Widows head of industrial relations, said: 'Such explicit disclosure could lead to policyholders, who can see their returns are being subsidised, cashing in their investments.
'This might lead to anti-selection against those who do not cash in. If some of the very big policyholders, such as group pension schemes, do this, it could have a very large effect and damage returns for the rest of the policyholders.'
Policyholders with sophisticated advisers would clearly be at an advantage against those with more passive advisers, Andrew added. The rule, he concluded, might make funds less willing to smooth against volatility, thereby making the with-profits sector less attractive.
Michael Leahy, Standard Life marketing director, agreed with Andrew's concerns about the smoothing disclosure proposal. He said: 'What could happen is that smoothing would become unsustainable.
'If we put too much information in front of the customer, smoothing will become unsustainable and we will end up killing the goose that is laying the golden egg, as more sophisticated customers could act to the detriment of other customers who are playing the game fairly.'
The discussion paper is a response from the regulator to the Sandler retail savings industry review.
In the paper, FSA managing director John Tiner acknowledged the dangers of the information disclosure recommendation having 'the unintended effect of encouraging selection against funds in weak investment markets, which could damage their financial stability'.
But, he added: 'This risk is, of course, balanced against the objective of transparency and Mr Sandler points out it could be mitigated by application of market value adjusters to terminating policies.'
On a positive note, Andrew said, since the Sandler Review reported last May, Scottish Widows has launched two funds that comply with some of its recommendations.
'These funds ' with-profit income and with-profit growth portfolios sitting within our flexible options bond ' have gone through on a 100:0 basis,' he noted. 'All the investment returns accrue to policyholders. This makes customer understanding a lot easier and the funds have proved popular.
'The other thing we would agree with is telling policyholders exactly where all investments are going. The fact is with-profits are fundamentally investment vehicles.'
After issuing its discussion paper, the FSA said it particularly wants to hear whether respondents believe the operational model should be applied to all future new with-profits funds.
With-profits products continue to come under fire following major problems in the life industry, such as mis-selling of pensions and the underperformance of mortgage endowment products. There has also been much controversy over the ownership and attribution of inherited estates.
The Equitable Life crisis brought Sandler's concerns into sharp focus. Tiner added: 'We strongly support Sandler's objective of achieving greater transparency and intelligibility for with-profits business.
'And we agree with his broad approach to the corporate structure within which it is proposed firms should write with-profits business.'
Respondents may also comment on whether, like the FSA, they see merit in essentially limiting with-profits funds to tradeable assets and preventing the funds from financing their firm's other business ventures.
100 new clients
Achievements, charity work and other happy snippets
Square Mile’s series of informal interviews
Partner Insight: The rise in demand for DFM and multi manager solutions has been largely driven by new mandates from the regulator, says James Bampton, head of UK intermediary distribution at Architas