Authority (FSA) has come under fire from consumer advocacy group
Which? that accuses it of “once again leaving
policyholders in the lurch”.
The accusation follows the FSA’s announcement
that it has established a further consultation paper relating to
compensation and redress payments arising from what it terms
“operational failures” including mis-selling that life insurers may
currently charge to the inherited estate of their with-profits
In essence, inherited estates are funds
surplus to an insurer’s realistic liabilities in smoothed with
In August 2008, the regulator issued the first
consultation paper on the issue of inherited estates. In the paper,
it proposed a radical amendment of current rules under which an
insurer may pay compensation and redress to aggrieved policyholders
from the inherited estate of its with-profits fund or from other
assets attributable to shareholders.
Under the FSA’s proposed new rule, insurers
would no longer be able to use funds in inherited estates and would
have to meet the cost of future compensation and redress payments
In the FSA’s first consultation paper it
proposed that the new rule would apply for all compensation
payments made after 1 November 2008, regardless of when the
The FSA now proposes that the amended rules
should only apply to compensation and redress payments resulting
from events that take place after the rule comes into force. The
new rule is provisionally scheduled to come into force at the end
It is with this amendment to the proposed rule
that Which? takes issue.
“With bonus rates plunging and transfer
penalties being introduced, the last thing people need is firms
raiding with-profit funds to pay for their own regulatory
failings,” said Which? CEO Peter Vicary-Smith.
“It is outrageous that insurance companies
will be let off the hook, depriving policyholders of millions of
The FSA was jolted into action a damming
report by a Treasury Select Committee (TSC) tasked with a probe
into life insurers’ use of funds in inherited estates.
In an overview of its findings, the TSC’s
chairman John McFall noted: “The approach taken by the FSA towards
inherited estates seems a long way from the philosophy of
principles-based regulation to which it aspires.”
Coming in for particularly harsh criticism
from the TSC was the charging by insurers of mis-selling
compensation costs to inherited estates.
Terming it an “inappropriate” practice, the
TSC stressed the vast bulk of mis-selling costs must be borne by
shareholders “because it is the duty of shareholders, through the
managers of the firm, to ensure staff behave appropriately when
“I was astonished that Prudential had taken
£1.6 billion from their inherited estate to pay the costs of
compensation arising from mis-selling,” said McFall in the
The committee’s inquiry also revealed that
Norwich Union, a unit of Aviva and soon to be rebranded, has so far
charged £202 million ($290 million) to its inherited estate and has
set aside a further £64 million for future claims.