FSA proposals to ban use of surplus to pay mis-selling claims

The watchdog’s rules currently allow firms to pay the costs of compensation and redress from the inherited estates of their with-profits funds.

The FSA said it had re-examined these rules and concluded that there was a case to consult again on whether shareholders alone should meet the cost of compensation and redress as the current rules may not lead to the fair treatment of policyholders.

The inherited estate is the part of the with-profits fund that is judged to be surplus to what is needed to meet the fund’s liabilities – and is retained as working capital by firms, but could be distributable to policyholders in future.

They have been built up from sources such as premiums from past generations of policyholders and associated investment returns, and/or past capital injections from shareholders.

The consultation – Consultation Paper 08/11 'With-profits funds-compensation and redress' – will close on September 3 and a policy statement giving feedback on the consultation is due to be published before the end of the year.