With-profits compensation shake-up on the cards
Insurance companies could be banned from using the inherited estates of with-profits funds to pay compensation to customers who have been mis-sold policies.
The currently rules allow firms to use money from the inherited estates – the surplus part of the with-profits funds – to meet any compensation payouts, such as endowment mortgage mis-selling refunds.
However, the financial regulator, the Financial Services Authority (FSA), has raised concerns that this practice may not be fair to policyholders.
In a consultation paper proposing the changes to the rules, it states: “Shareholders alone should bear the risk of such management failures.”
Legally, the inherited estate is owned by the insurer – hence the rules allow it to use the money to meet redress payments. But in most with-profits funds, the inherited estate has been built up over the years from previous policyholders, the investment returns from premiums and injections of capital from shareholders.
There is, therefore, an argument that the money within inherited funds belongs to policyholders. For this reason, insurers are required on an annual basis to consider giving back the “excess” of inherited estates to current policyholders – a process known as redistribution.
However, any changes to the current rules are unlikely to come into play for some time. The FSA will launch a consultation on this issue, and will report back at some point after 3 September 2008.
The practice of a dishonest salesperson misrepresenting or misleading an investor about the characteristics of a product or service. For example, selling a person with no dependants a whole-of-life policy. There have been notable mis-selling scandals in the past, including endowment policies tied to mortgages, employees persuaded to leave final salary pensions in favour of money purchase pensions (which paid large commissions to salespeople) and payment protection insurance. There is no legal definition of mis-selling; rather the Financial Services Authority (FSA) issues clarifying guidelines and hopes companies comply with them.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.