The Treasury Committee has given a damning verdict on the FSA's regulation of the with-profits sector concerning inherited estates.
In a report on the issue published today, Treasury Committee chairman, John McFall MP says the FSA’s response to inherited estates is a long way from its principles-based approach.
Inherited estates, excess assets within a long-term fund over and above those needed to meet liabilities, are open to abuse by fund managers, according to the Committee
The Treasury Committee’s investigation focused on how the interests of with-profits fund policyholders were protected by the FSA, with a close look at issues surrounding inherited estates.
It says conflicts of interest may arise as shareholders control fund strategy through their management of life firms and can stand to gain at the expense of policyholders by using inherited estates.
The report criticises the FSA for failing to develop clear principles for the regulation of inherited estates. It says the regulator has instead become “embroiled in making judgements in the round and micro-regulating particular firms’ situations”.
McFall says the FSA should disallow all firms the right to charge shareholder tax as some life firms can use this discretion for the benefit of shareholders, and to the detriment of policyholders.
Most firms are not allowed to charge shareholder tax to their inherited estate, however, those firms with an established practice of doing so can, which McFall says is unfair.
He says shareholder tax is a good example of the FSA’s ‘barmy’ regulation in the field and indicates the regulator is not taking principles-based regulation seriously.
The Committee has called for the industry to improve transparency in the application of smoothing effects using inherited estates. In addition, mis-selling compensation costs should not be charged to inherited estates, and instead the costs of mis-selling should be borne by shareholders, as it is the duty of shareholders to ensure staff behave appropriately.
Commenting on today’s report, McFall says: “The approach taken by the FSA towards inherited estates 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.”
McFall says he was shocked to find that Prudential had taken £1.6bn from its inherited estate to pay the costs of mis-selling claims, which was detrimental to policyholders.
Clare Spottiswoode, policyholder advocate in the proposed Norwich Union reattribution, welcomed the report and says the FSA needs to more to protect policyholders.
"“The committee has highlighted the importance in a reattribution of the funding of new business and the FSA must now be prepared to defend publicly any decisions it takes in assessing the fairness of reattributions," she says.
"Also identified in the report is the vital role that the FSA must play in a reattribution, supporting the policyholder advocate, in ensuring that a fair price is offered, not just an adequate one."
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