FSA and the With Profits farce

Is the FSA missing the point re: with profits funds?.

I am not a fan of the Financial Services Authority. It has been a more or less dismal failure from the start, and has always worked on the basis that when something goes wrong and there’s a stink, they’ll try to change the rules retrospectively and argue for the employment of even more civil servants to stop it happening again. The list of things they failed to prevent runs through mis-selling of personal pensions, to geared split cap investment trusts, to sub prime mortgages. Politeness alone prevents any mention of the prime snafu – the regulation of the Banks.

A couple of weeks ago they delivered yet another tome on the subject of With Profits. Of the £330 billion that we have in these funds, the bulk of it presumably in Pension Plans and With Profit Bonds, some £110 million is in funds that are closed ie they are not taking on new customers. The bulk of these funds perform less well than funds that are open. The charges to the policy holders, who have invested unknowingly in a sort of quasi-equity, are clothed in knitted smoke.

The FSA relies a lot in this tome on some ‘customer stakeholders’ without telling us who they are. To save you reading the report, here is a summary. With Profits are complex but communications to customers must be clear, fair, and not misleading. Yep, that’s about it. Oh, and Life companies ought to toughen up the With Profits Committees that the FSA invented to do the job that the directors were already legally obliged to do. Plus it isn’t fair if a With Profits fund holds on to a big surplus for safety’s sake, and it isn’t fair if it doesn’t hold on to a big surplus because it wants its performance to look good.

So, having identified the issue – that millions of us are stuck in closed funds, the FSA has no solutions. This is scandalous.

When Fred took out his policy with the Rockcake and General there was a mutual commitment. Fred would pay the premiums and the R & G would keep its promise. Now the R&G has sidestepped its obligations by selling out to some entrepreneur, why should Fred keep his part of the bargain? Because, the FSA would argue, the entrepreneur has satisfied the Court that he will keep the R&G’s promises. It is thus, in the eyes of the regulator, OK for Fred to be parked in a fund that is likely to underperform.

I have an alternative proposition. When a Life Company is sold, the With Profits policy holders should be given a straight choice. Stay put, or take your share of the assets and put them somewhere else. This works for Bonds, Pension Plans, and all forms of Savings Plan: every Life company can calculate asset share at the level of the individual policy. It doesn’t work for Life Insurance policies, which might have to stay where they are.

This might hasten the end of with profits altogether, which is what the FSA should be aiming to achieve but isn’t. There is nothing that a With Profits fund can do that can’t be done some other way. It’s a relic, an antiquity going back to the days when the early mutual insurers felt embarrassed by how much money they were making and quite sensibly found ways to share the profits with the members. It will always be opaque because it is about judgement, and nowadays we don’t care for opaque, nor for a proposition that boils down to “trust me, I’m an actuary”.

Anyone up for a serious lobby on this one?

Read this article at http://www.candidmoney.com/articles/article130.aspx