FSA backtracks on with profits compensation rules

Under current rules, a firm may pay compensation and redress from assets attributable to shareholders or from the inherited estate of its with profits fund.

These proposals relate specifically to proprietary firms like Prudential and Aviva rather than mutuals.

The regulator is now proposing that the amended rules should only apply to compensation and redress payments resulting from events that take place after the rule comes into force and this will provisionally be the end of July.

The With Profit Funds – Compensation and Redress Consultation paper stated: "The proposed rule will not affect the current requirements relating to the provision, identification and valuation of liabilities in with profits funds.

"Firms will continue to be required, where appropriate, to make a provision in their with profits funds for liabilities to make compensation and redress payments to policyholders of that fund."

In a consultation paper published in June last year, the regulator proposed shareholders alone should meet the cost of future compensation and redress payments as the current rules may not lead to the fair treatment of policyholders.

Peter Vipond, director of financial regulation for the Association of British Insurers, said: "We will respond to the consultation in due course, but it is encouraging that the FSA has accepted the danger of retrospective changes for both policyholders and shareholders."

The FSA is backtracking because life companies can still charge with profit funds prior to the rules coming in July, according to Which?. Peter Vicary-Smith, chief executive, said the regulator has left policyholders in the lurch and sided with the financial services industry.

David Barnett, principal of Middlesex-based IFA DPB Independent Financial Services, said life companies run with profits on behalf of their clients and should not be able to raid them.

He said: "Compensation should be made by the company itself not the with profits policy and if that means that share price is affected so be it.

"With profits are not as bad as people make out and have protected investors from the credit crunch. Some unit trust funds have declined by up to 40 per cent."

The consultation paper will close to responses on 22 May 2009 the regulator said it will finalise the draft rules in light of responses.

Last week Aviva said it has not ruled out ditching the proposed reattribution of its £1bn inherited estate but insisted pulling the plug was not the preferred option.