Final rules affecting consumer rights and provider responsibilities with regard to with-profits policies have been published by the FSA.
Policy Statement 05/1 Treating with-profits policyholders fairly outlines changes in the areas of management costs, early surrender penalties, maturity payouts, new consumer-friendly principles and practices of financial management (CFPPFM) and the appointment of a policyholder advocate to protect interests of policyholders.
Early surrender rules will be affected by wording changes to the Conduct of Business rules, to ensure “surrendering policyholders are as entitled to fair treatment as those who hold to maturity.”
The wording changes are to ensure the FSA’s intended policy of making sure surrendering policyholders are not penalised to ensure windfall profits for those who stay until maturity is fully understood, the regulator states.
As part of overall fairness, the FSA will also be requiring more specified use of target ranges in calculating surrender and maturity values.
”At least 90% of maturity payments should fall within the target range to situations where individual policy asset share calculations are used as well as to those where specimen policy asset share calculations are used, today’s documentstates.
The issue of closed with-profits funds being used to write new non-profits business by mutuals has received close attention.
Previous feedback indicated rules proposed by the FSA would block such business from taking place.
The issue of fairness as the regulator sees it is that profits derived from non-profits business financed by money that otherwise may have gone to with-profits policyholders should be seen to make its way back to such policyholders.
”The general principle that with-profits policyholders in closed funds should receive proportionate benefits from investments made from assets that might otherwise have been distributed to them seems a clear fairness issue,” the FSA states.
”In our view, any potential future issue arising in a mutual should be dealt with appropriately through our normal supervisory process, taking into account the particular circumstances of the firm. However, we have extended our guidance to give some assistance to mutuals in this situation, provided the over-arching rule on terms of new business is complied with and that their with-profits policyholders consent to the proposed action.”
Demands of CFPPFM in particular may be debateable as the FSA itself admits the costs may outweigh the benefits, even if this new regulatory demand is piggy-backed onto existing plans to meet PPFM requirements.
”We accept the costs of sending CFPPFM information to existing with-profits policyholders who do not receive annual statements is likely to outweigh the benefits in terms of greater consumer understanding. This is partly because we agree that such information is more likely to be read and used appropriately when placed in context. We still, however, consider that consumers would benefit from having this information as part of existing policyholder mailings, the document says.
The regulator goes on to say that: “The purpose of our CFPPFM requirements is to do this in plain and clear language so that consumers can gain not only a better understanding of with-profits but also of what to expect from their policies.”
”We expect the CFPPFM information to cover the risks associated with investing in with-profits but not to be used as a means of either promoting or discouraging the use of with-profits as an investment vehicle.”
CFPPFM information will be required to be sent with the next annual statements if these are sent to existing with-profits policyholders.
A deadline of 30 June has been given as the date proposed changes take effect, with a six-month transition period thereafter.
CFPPFM requirements will take effect from 31 December.IFAonline
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