The FSA’s proposed clampdown on insurance firms writing new with-profits business could lead to the closure of smaller insurers, according to the Association of Financial Mutuals.
Last week, the FSA proposed rules that will mean providers wanting to use capital in with-profits funds to write new business will have to demonstrate it will not erode the value of the fund or cause consumer detriment.
AFM chief executive Martin Shaw says: “The proposals could hasten the closure of mutual and smaller organisations and cause bigger mutuals to reconsider their status. For mutuals, the only source of capital is the money in the with-profits fund, while firms like Aviva have shareholder funds providing the capital.”
The FSA says “a substantial minority” of firms write new business in their with-profit fund that is loss-leading and will not break even, reducing the amount of money available to distribute to policyholders.
Shaw says firms use money resulting from intergenerational transfer that does not relate to current policyholders to back new business and it would be fundamentally wrong to pay that out to policyholders.
Wednesday, June 22, 2011
FINANCIAL NEWS:Latest World Headlines: Shaw Capital Management | FSA issues warning on structured products
Structured products are increasingly being marketed by banks and wealth managers to consumers who are tempted by the headline rates on offer at a time when returns on cash are still close to zero.
Typical products will lock up capital for five years and offer investors a proportion of any return on the stock market over that period. But many “guaranteed” products in fact only protect capital if the stock market does not fall below a certain level over a certain period of time.
The regulator has had the investment products on its radar after a review in 2009 of products backed by Lehman Brothers found that sales advice had been either unclear or misleading in two-thirds of cases.
But sales of structured products have shot up since the credit crunch, with a 48 per cent rise in new sales in 2009 compared with 2008, according to the website Structuredretailproducts.com.
The UK retail market was worth £52bn at the end of 2010, up from £46bn the previous year. The FSA said it had taken steps to introduce the new rules after evidence that its current guidelines, introduced in 2001, were not working.
“We already have a rule that says firms have to be fair, clear and not misleading – but in a lot of cases we’re finding that’s not working,” the FSA said.
Structured products have been behind some of the largest fines imposed by the regulator in recent months, including a £1.4m fine on Norwich & Peterborough Building Society in April for mis-selling the investments and a £700,000 fine on RSM Tenon last year.
Some independent financial advisers have also faced individual fines for failing to explain the risks of the products properly. A consultation on the proposal is open to August 6.
The FSA expects to publish the results of a separate investigation into how structured products are sold and marketed to consumers later this year, which is expected to clamp down on sales practices further.
Typical products will lock up capital for five years and offer investors a proportion of any return on the stock market over that period. But many “guaranteed” products in fact only protect capital if the stock market does not fall below a certain level over a certain period of time.
The regulator has had the investment products on its radar after a review in 2009 of products backed by Lehman Brothers found that sales advice had been either unclear or misleading in two-thirds of cases.
But sales of structured products have shot up since the credit crunch, with a 48 per cent rise in new sales in 2009 compared with 2008, according to the website Structuredretailproducts.com.
The UK retail market was worth £52bn at the end of 2010, up from £46bn the previous year. The FSA said it had taken steps to introduce the new rules after evidence that its current guidelines, introduced in 2001, were not working.
“We already have a rule that says firms have to be fair, clear and not misleading – but in a lot of cases we’re finding that’s not working,” the FSA said.
Structured products have been behind some of the largest fines imposed by the regulator in recent months, including a £1.4m fine on Norwich & Peterborough Building Society in April for mis-selling the investments and a £700,000 fine on RSM Tenon last year.
Some independent financial advisers have also faced individual fines for failing to explain the risks of the products properly. A consultation on the proposal is open to August 6.
The FSA expects to publish the results of a separate investigation into how structured products are sold and marketed to consumers later this year, which is expected to clamp down on sales practices further.
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