The Financial Services Authority (FSA) yesterday further back-tracked on its promise to stop insurance companies using policyholders’ money to pay their mis-selling costs.
Releasing an update to a consultation paper it issued last year, the regulator said it would no longer be backdating proposals which will stop insurers using spare cash in their with-profits funds to pay compensation to customers who were mis-sold. Last year, it emerged that several life insurers had been plundering their “inherited estates” to pay the costs of thousands of successful with-profits mis-selling claims. Prudential admitted it had charged as much as £1.6bn in mis-selling claims to its inherited estate.
The inherited estate is the surplus money in a with-profits fund, which cannot be directly attributed to any one policyholder. The majority of this money is the property of the remaining policyholders in the fund, although the company’s shareholders also have a claim to a share in the cash.
Insurers were criticised by the Treasury Select Committee last summer, when it emerged that they had been using the money in their inherited estates to pay compensation to those to whom they had mis-sold insurance products.
In an initial consultation paper published last year, the FSA suggested that after 1 November 2008 no insurer would be able to use funds within their inherited estate to make mis-selling payments, regardless of when the mis-selling had occurred.
However, yesterday’s announcement means insurers will be allowed to continue making mis-selling payments from its inherited estate indefinitely – as long as they relate to historic claims. Only mis-selling claims which relate to policies sold after July this year will be exempt from receiving payouts from the inherited estate.
Which?, the consumer group, which believes that 100 per cent of an inherited estate should be passed over to policyholders, said that the FSA’s latest decision would leave policyholders worse off. “The FSA has, once again, left policyholders in the lurch, and sided with the financial services industry,” said Peter Vicary-Smith, the chief executive of Which?. “This regulator repeatedly shows it’s unwilling to stand up for the interests of with-profits policyholders.
“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. It’s outrageous that insurance companies will be let off the hook, depriving policyholders of millions of pounds.”
Very few with-profits policies are now sold every year, and it is unlikely that policies sold after July this year will ever be the subject of mis-selling claims. However, insurers have now been given the green light to use their inherited estates to compensate the thousands of existing claims that are still being processed.
Norwich Union is in the process of redistributing its inherited estate to policyholders and shareholders. However, earlier this month it announced that policyholder payouts were likely to be slashed due to the recent collapse in stock markets.Reuse content