Improvements needed in advice and governance of closed life funds

The Consumer Panel today calls on the FSA and the industry to ensure all customers in closed and ‘quasi-closed’ with-profits funds have access to advice and that ‘independent’ representation of policyholders’ interests in the financial management of these funds is genuinely independent of the company board.

These are two key recommendations of “Are customers in closed life funds being treated fairly?” – an independently researched report published today by the Financial Services Consumer Panel. The research identifies about 8 million with-profits customers who are unable to get independent advice on their with-profits policies because their funds are too small to generate an economic commission for advisers for the complex work involved. Advisers may also be reluctant to review policies because they fear future allegations of churning.

The Panel urges the FSA to consider introducing some form of limited or focused advice for with-profits policies. This could be made available through specialist individual firms and trade associations, for example. Insurance companies could support this initiative by making with-profits review tools available to advisers on their websites. Several providers have already taken this welcome step.

There is a particular concern that proprietary companies running closed with-profit funds may not always act in the best interests of their policyholders. Although since 2004 the FSA requires an independent voice to represent policyholders, such as a with-profits committee, the Panel's research showed that 60% of these committees have no independent members but use directors of the main board of the company or individuals closely associated with the company, for example non-executive directors and former directors. The Panel would like to see these committees with a majority of members entirely independent of the board.

The report also questions whether the with-profits fund is always being used in the best interests of policyholders. The research found that companies could use this capital to fund new business development, pay shareholder tax and settle mis-selling claims.

Another important area that requires urgent action is insurance company administration. The report examines the delays advisers and their clients experience when they try to get essential information about a policy from the provider in order to undertake a review, exercise the right to use a market value reduction-free exit period, the open market option (OMO), and the sale of a policy in the traded endowment policy (TEP) market. These delays can cause customer detriment, the report states. The Panel believes that efficient administration should be part of any assessment of Treating Customers Fairly (TCF). It also criticizes the too often incomprehensible documents customers receive about important changes to their policy – for example on closure or consolidation. This denies customers the chance to make informed decisions.

The Panel is calling for the following action:

On the provision of advice, the FSA and industry should work together to provide some form of limited or focused advice on with-profits policies through companies or trade associations assisted by life companies. They could also provide with-profits review tools on their websites for advisers to use;

Communications from companies should not assume that policyholders have access to independent advice and should include all material facts written clearly so policyholders can understand and act on the information;

A truly independent with profits committee seems to be the right mechanism for proprietary companies to achieve fair representation of policyholders’ interests.
More research is required in this important area.

John Howard, Chairman of the Financial Services Consumer Panel said: "These are complicated products that consumers had little chance of understanding.

Despite the work done by the FSA to regulate this sector, many consumers remain suspicious and worried. The information sent out by firms is too often incomprehensible and it is almost impossible for most people to get advice about their policy. Consumers feel locked into these products by MVRs, which, understandably, they regard as penalty charges, while the so-called ‘independent’ committees meant to protect consumers are often packed with company men. Not surprisingly the closure and sale of with profits funds, even though some have performed well, has been accompanied by a rising tide of consumer discontent."