The FSA has been accused of betraying with-profits investors by allowing insurance companies to continue making compensation payments from inherited estates.
Consumer magazine Which? says the FSA's decision to allow the practice to continue is ‘madness'.
Confirming its new stance on with-profits funds and compensation, the FSA will prevent insurers from raiding inherited estates to meet compensation payment for future policyholders.
However, the rules will not be applied retrospectively, meaning inherited estates will remain a target for insurers for many years to come.
The changes come into effect on 31 July, meaning all new policyholders who successfully apply for compensation due to mis-selling will have to be paid from a firm's profits.
The FSA had previously promised to apply the rules to all compensation cases, regardless of when they happened, but backed down in February this year.
Dan Waters, FSA director of retail policy and conduct risk, says: "The changes we are confirming today are an important development..., which seek to ensure that policyholders do not pay for costs resulting from management failings. In future, the liability for compensation and redress payments will rightly fall to shareholders as the owners of life companies."
However, Which? says the FSA has betrayed consumers by allowing the practice to continue for existing policyholders.
The consumer champion's chief executive, Peter Vicary-Smith, says: "This is an unbelievable betrayal of consumers who are taking hits from all sides. It appears the FSA is allowing the financial services industry to dictate policy once again.
"In the current environment it seems ludicrous that firms can raid with-profit funds to pay for their own regulatory failings. The FSA must stand up to this industry."
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