The Financial Services Authority of UK has published a consultation paper which proposes that insurance companies will no longer be permitted to charge compensation for mis-selling to the inherited estates of with-profits funds. The proposals relate specifically to proprietary firms and not mutuals.
Financial Services Authority (FSA) rules currently allow firms to pay the costs of compensation and redress from the inherited estates of their with-profits funds.
The FSA has re-examined these rules and concluded that there is a case to consult again on whether shareholders alone should meet the cost of compensation and redress as the current rules may not lead to fair treatment of policyholders.
The inherited estate is the part of the with-profits fund that is judged to be surplus to what is needed to meet the fund’s liabilities. It is retained as working capital by firms, but may in future be distributable to policyholders.
Inherited estates have built up over the years from different sources: premiums from past generations of policyholders and associated investment returns, and/or past capital injections from shareholders. FSA rules already require firms to consider whether they have an excess surplus in a with-profits fund that should be distributed to policyholders.