Shareholders To Pay

The City watchdog has told insurance companies they must no longer find compensation from their with-profits investment funds.

Operational failure fines and compensation my previously have come from surpluses and policyholders’ funds, but now the Financial Services Authority (FSA) has said that, from July 31st, shareholders must pay these off instead.

According to consumers’ association Which?, these rules have been somewhat diluted compared to the original proposals. It also says it wanted the rules to cover retrospective cases of mis-selling.

Surplus funds, or inherited states, have been built up over decades in the ‘with profits’ funds of life insurance companies. They are used to pay compensation and fines of millions of pounds, that are imposed on companies fined for mis-selling policies.

Consumers Paying For Mistakes

According to a spokeswoman from Which?, consumers are therefore effectively paying for the companies’ mistakes.

However, after 31 July, any mis-selling will no longer result in compensation using funds from inherited estates according to the FSA.

The FSA’s director of retail, Dan Waters said: “It is essential that with-profits policyholders are treated fairly. In future, the liability for compensation and redress payments will rightly fall to shareholders as the owners of life companies.”

However, compensation for mis-selling that occurs before July 31st can still be paid using the funds.

No Back-Payments

According to Which?, this is very different from previous proposals made by the FSA, which planned the ban regardless of when the mis-selling occurred.

The company’s chief executive, Peter Vicary-Smith said: “This is an unbelievable betrayal of consumers who are taking hits from all sides again. It appears the FSA is allowing the financial services industry to dictate policy once again.”

There are currently very few with-policies sold, and several insurers have greatly cut the value of their giant with-profits investment funds recently, along with the payouts being given to savers when their policies mature.

This is primarily because of last year’s fall in share prices and the value of commercial property.

What Do You Think?

Is the new policy fair? Should it have been back-dated? We would love to know your thoughts and opinions. Leave your comments here.