Insurers not out of the woods with FCA probe

Insurance companies have had a torrid few weeks.

First we had the demolition of the annuities market in the Budget; now we have a major investigation by the Financial Conduct Authority (FCA) into the level of profits they have made from funds closed to new business, in particular policies such as pensions, endowments and investment bonds sold by direct sales forces since the 1970s.

It's fair to say, the Association of British Insurers is spitting blood, and is even according to some reports trying to force the resignation of chief executive Martin Wheatley.

While the Budget took everyone by surprise, the new FCA investigation emerged from a briefing by Clive Adamson, a senior FCA official, and contributed to a "disorderly market" in insurers' shares last Friday, which tumbled en masse for the second time in two weeks.

The FCA was forced to clarify its intentions in a statement, saying: "This is not a review of the sales practices for these legacy customers and we are not looking at applying current standards retrospectively - for example on exit charges."

It also said that it has no plan to review the 30 million policies sold from the 1970s to 2000.

Lack of fairness

The regulator also brought forward its business plan, which it published on Monday morning, but this drew immediate criticism from The Wealth Management Association which criticised what it sees as a lack of fairness in the funding model for the Financial Services Compensation Scheme (FSCS).

If there are systemic issues in this sector, debt management firms will be required to review past arrangements to identify the extent to which vulnerable customers may have suffered financial detriment and therefore require financial redress."Ian Stott

In particular, it suggests that firms undertaking promotional activities escape lightly.

Investment firms could be forced to pay an additional £30 million into the bail out fund over the next two years, simply to cover claims arising from the failure of product promoter Catalyst Investment Group, which was "not required to pay anything" into the FSCS, it argued.

The Association added that IFAs in Malta can also claim off the UK compensation scheme in relation to Catalyst.

The FCA review also announced an investigation into potential conflicts of interest when wealth managers and private banks use in-house funds, an area which is opaque and will take some grappling with.

The business plan also showed the FCA will probe further into how firms can reduce the risk of traders manipulating key benchmarks, such as the Libor manipulation scandal.

The regulator is also preparing for the operational launch of the Payment Systems Regulator, which will fall within its existing structure and have responsibility for massive payment services industry.

The review also set out the FCA's annual funding requirement which at £446.4 million, is up 3.3% on the previous year. The increase has been required by increased headcount and improvements to the regulator's information systems and technology platform.

Larger groups riskier

Chief executive Martin Wheatley said the increase will be borne by larger complex groups, which pose more risk and are most expensive to regulate.

Separately the cost of setting up the consumer credit regime which now falls under the FCA's remit, will be about £41 million, and will be gradually recovered from consumer credit firms once the regime becomes fully operational in 2016-17.

The regulator's examination of debt management firms could uncover systemic unfair treatment of customers.

"If there are systemic issues in this sector, debt management firms will be required to review past arrangements to identify the extent to which vulnerable customers may have suffered financial detriment and therefore require financial redress," said Ian Stott, client services director at The Consulting Consortium.

"Whilst individual redress values in these circumstances would most likely be relatively low, there is the potential to uncover systemic unfair treatment of customers in this sector, which would place a significant burden on firms that have already been required to review their debt management propositions by the FCA."

The insurers recovered today. Resolution, which owns Friends Provident, ended the afternoon up 1.27% to 299.80p. Aviva climbed 1.4% to 477p and Phoenix Group rose 0.7% to 656.5p.