We don’t think with-profits policies are a great investment, but there are still over 25 million of them in the UK, worth around £330 billion. But is the financial regulator doing enough to protect the policyholders?
Which? has been highly critical of the FSA’s regulation of the with-profits industry. We don’t think the current rules do enough to ensure that firms treat you fairly. Put simply – the regulation doesn’t guarantee that the funds are run in your best interests.
With-profits funds are a type of investment with a life assurance provider. The provider pools your money with other investors and if it performs well you should get an annual bonus each year, and you may get a ‘terminal’ bonus when it comes to an end.
Using your money to pay compensation
The problem is that certain companies have been using money from the fund to subsidise loss-making new business and pay the shareholders tax bills. When they mis-sold a product and had to pay compensation they just charged it to the fund. These practices provided about as much benefit to you as taking your money out into the street and burning it.
Even worse, in the weak regulatory environment, companies like AXA and Aviva have been able to get their hands on much more than their normal 10% share of the funds’ vast inherited estates. Although policyholders have seen a decade of poor returns, AXA shareholders have more than tripled their money by raiding the estate.
Who’s watching them?
With-profits committees are supposed to provide some independent judgement to the company about how the fund is run. But – a further problem for policyholders – these can contain members of the company’s board of directors. We believe these committees should contain more independent people – those who will fight for the fund to be run in your best interests.
The FSA is now proposing action to ensure firms quickly improve their operations, for example by making immediate changes to their committee arrangements, and will consider disciplinary action if firms do not address the concerns. However, these changes are opposed by the industry and there is a risk that responsibility for with-profits could be allocated to the Prudential Regulatory Authority which could lack the ability to ensure you are treated fairly.
Which? is working to ensure that policyholder interests are better protected and will carry on meeting with FSA and Government officials to press the case for change. We’re making progress and it’s clear that having policyholders make their views known really helped make the FSA and MPs take the issue more seriously.
Do you have a with-profits policy? What changes would you like to see to guarantee that you’re treated fairly?