Two unnamed firms have been referred to the FSA's enforcement division for further investigation following a review of the £330bn with-profits sector.
A number of other firms have been directed to make immediate changes to their governance arrangements to better protect policyholders' interests, as the FSA says it will take 'strong action' to ensure its requirements are met.
It follows a comprehensive review into the operation of with-profits funds which saw the FSA assess 17 firms representing, as at 31 December 2009, about 80% of the assets in the with‑profits market.
At the end of 2009, there were around 25 million with‑profits policies held by consumers representing £330bn assets under management.
The review focused on whether firms are treating their with-profits policyholders fairly, looking specifically at how senior management in firms have implemented FSA rules.
According to the findings, the performance of firms is mixed. Some firms are performing satisfactorily, it says, but "a significant number of firms are not adequately demonstrating the practices the FSA expects from a well-run with-profits business".
It pinpointed two main areas of concern
- ineffective governance of with-profit funds, especially in how independent challenge is provided by firms' with-profits committees, which means that policyholders' interests may not be properly protected; and
- significant weaknesses in the quality of consumer literature - the FSA is not satisfied that all firms are doing enough to ensure that policyholders receive sufficiently comprehensive, timely and clear information to help them understand their policies.
The FSA also expressed concern about the length of time taken for Aviva's reattribution to policyholders as this unduly prolonged uncertainty and made effective financial planning more difficult.
It advises more preparation can be done to reduce the areas of ambiguity before a reattribution proposal is publicly announced which will shorten the period of uncertainty for policyholders.
Ken Hogg, FSA insurance sector director, says: "This review shows that, while there has been some progress, there is still more work to be done by firms in the with-profits sector to make sure that their policyholders are treated fairly. We expect all firms to raise their game in this area, not just the firms that we reviewed.
"Our focus on with-profits does not end with this review. Firms should make sure that their communications with policyholders are clear and manage expectations about the likely performance of their policy. They should also ensure that their with-profits committees are providing an independent challenge to their management. We will continue our intensive supervision of the with-profits sector and we expect firms to take action to address our concerns."
The conclusions of the FSA's policy review on with-profits and any proposed changes will be published in a consultation paper before the end of 2010. Policy proposals which might be directly affected by Solvency II considerations will be released in 2011.
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