The FCA’s latest thematic review into the fair treatment of with-profits customers found the majority of firms were handling customer risk well although some areas were in need of improvement.
The regulator selected a sample of eight firms which accounted for 80 per cent of total with-profits assets within the market and constituted a mixture of funds closed and open to new business, mutual and proprietary firms, and funds and firms of varying sizes.
The review found providers were failing to use their run-off plans as intended or described in the FCA’s rules and guidance. In particular the FCA found run-off plans were not being kept up to date so the company could not manage the ongoing run-off of a closed with-profit fund fairly.
A run-off plan is used to show how a firm will ensure the distribution of the closed with-profits fund and any inherited estate is done fairly but the FCA found several firms had not updated their run-off plans up to 10 years.
The FCA said: "Our policy intention behind the requirement for a run-off plan is that firms would have comprehensive and up-to-date plans for each with-profits fund. These plans should give management and the board a holistic and long-term view, allowing them to manage the run-off of the fund in the interests of all with-profits customers.
"Without this there is an increased risk of poor customer outcomes through, for example, an inappropriate investment strategy, or unfair estate distribution, due to changes in the fund or external operating environment."
The FCA also found weaknesses with the distribution of excess surplus in funds and insufficiently robust fund-level capital management approaches.
The review also highlighted that there was ineffective oversight and challenge by senior individuals and board members of these poor practices which could lead to bad and unfair outcomes for consumers.
Although the regulator provided firm specific feedback on how to improve their processes and had requested action from companies where poor performance was highlighted, the FCA was not proposing to consult on new rules and guidance on the back of the review’s findings.
But it said it would engage with senior managers through round-table discussions later this year and if the areas of poor performance were not addressed, it would consider taking further action.
With profits investments provide a significant portion of the long-term savings, pension and retirement income provisions of UK individuals. Money invested into a with-profits fund is pooled with other investors' money and invested in a mixture of shares, bonds, property and cash.
Almost £274bn was invested in with-profits funds at the end of 2017, compared to £1.1tn in unit-linked funds. Throughout 2017 £16bn was invested into with-profits funds and received approximately £23bn in claims paid out.
But the amounts invested in with-profits funds has fallen as fewer individuals are interested in investing in these funds for their private pension, with total with-profits assets falling from £426bn in 2001 to £296bn in 2015.
The FCA said: "With-profits business continues to be of decreasing importance to many firms, as it is mainly legacy business in run-off. This can lead to a lack of management attention focused on with-profits customer outcomes."
amy.austin@ft.com
