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The FSA Position On With-Profits |
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Who Are They?
The FSA is an independent body that regulates the financial services industry in the UK. It has been given a wide range of rule-making, investigatory and enforcement powers in order to satisfy its overall aim:
“To promote efficient, orderly and fair markets and to help retail consumers achieve a fair deal.”
The FSA regulates most financial services markets, exchanges and firms. It sets the standards that they must meet and can take action against firms if they fail to meet the required standards.
With-Profits Regulation
In recent years the FSA has become increasingly concerned at the state of the with-profits market and consequently has been regulating with increased intensity. With the FSA keeping a closer eye on with-profits funds, the level of transparity of the policies has improved, however, increased regulation can limit the degree of freedom with which the firms can invest in the fund, which in turn can affect the funds performance and in turn limit annual bonus rates.
Recently the FSA has insisted that all with-profits offices provide illustrations of maturity values, as well as MVRs which enables investors to compare how their policy is performing against competition and also against other forms of investment.
Another issue which has seen augmented regulation in recent years is that of closed with-profits funds. The FSA has issued a briefing note to the insurance sector warning them that rules drawn up to protect policyholders of closed-funds must be extended to those 'nearing closure'. It said it would be examining how communication between policyholders and providers, the investment strategies of closing funds and how inherited funds are managed.
FSA insurance head David Strachan said: 'The closed with-profits funds sector remains high on the FSA's agenda. This is not just in our day-to-day supervision, but also in protecting policyholders when funds are sold and helping ensure that policyholders receive adequate information.'
The FSA also said it would be looking closely at 'third party consolidators' that have acquired funds since the new rules were introduced last year. It added that it has produced a list of 10 questions to help policyholders in closed with-profit funds make investment decisions.
The FSA has, over the last few years, encouraged firms to improve the information they give to requirement for firms to publish and send to their customers Consumer Friendly customers and advisers both in terms of transparency and simplicity. One initiative is the Principles and Practices of Financial Management (CFPPFM) documents. This requirement came into force in early 2006.
What is a PPFM?
PPFM stands for Principles and Practices of Financial Management. It's a document that all with-profits insurers (including those that have closed their with-profits funds to new business) must produce and it describes how they run their with-profits business. Insurers must make their PPFM publicly available.
How much policyholders receive from their with-profits policies can be heavily influenced by an insurer's internal decisions and its use of discretion. However, these factors are not normally described in any detail. Producing and making available the PPFM will mean that policyholders, their advisers and market commentators are better able to understand how with-profits policies operate and what to expect from them. The PPFM should also enable insurers to control and manage their with-profits business better.
The PPFM covers any issue that has, or may have, a significant impact on how a with-profits insurer runs its with-profits business. Those issues will include how the insurer decides its annual and final bonuses, how it forms its investment strategy, how it applies charges and expenses and how it manages its inherited estate (if any).
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