City watchdog set to help beleaguered investors trapped in ‘zombie funds’. Insurers’ share prices take another hit

28th March 2014

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Millions of savers trapped in poorly performing investments and pension funds may be given a lifeline and allowed to take their cash or switch to a better deal writes Philip Scott.

The City watchdog, the Financial Conduct Authority is launching a review into so-called ‘zombie funds’, which could impact up to some 30 million policies sold by insurance groups as endowments, pensions and investment bonds between 1970 and 2000.

The regulator is acting over concern that firms are now “exploiting” loyal policyholders, who are “not given the same priority as new customers” and instead face high fees and substandard service according to a report in The Telegraph.

Insurance stocks, after already being walloped by the upcoming pension overall, have taken another hit on the back of the news with Aviva, down by 4%, Legal & General by 5% and Resolution, one of the main players in this arena off by a massive 11% in late morning trading.

The FCA publishes its Business Plan on Monday 31 March, which provides a picture of the key priorities and areas of work for the year ahead.

In a statement the FCA said: “The work on fair treatment of long standing customers in life insurance is a supervisory piece of work that will give us a better understanding of how this area functions. We are not planning to individually review 30 million policies, we will be speaking to firms about how we can undertake that review.

“As a forward looking regulator, we want to examine areas that are of interest and relevance to consumers and to firms and assess whether there is an issue that requires any action. No conclusions have been reached as work has not started.”

The review will look into with profits zombie funds, which are closed to new business, in some cases for a prolonged period of time. These vehicles generally perform poorly because there is no incentive to attract new customers. In addition investors typically have to pay a fee, known as an MVA or market value adjuster if they want to move their money somewhere else which in some cases these can be very high.

The watchdog is to consider banning these exit fees. Clive Adamson, the director of supervision at the FCA, told The Daily Telegraph: “We want to find out how closed-book products are being serviced by insurance companies, as we are concerned insurers are allocating an unfair amount of overheads to historic funds.”

With-profits policies, which typically come in the form of a pension, endowment or a with-profit bond investment were commonly sold by commission hungry life insurance sales people, as low-risk investments, which allocated investor cash across a combination of shares, property, bonds and cash.

The idea was that savers would be paid annual bonuses that are ‘smoothed’ by holding back some of the return in good years, so they can be paid more than they have earned in the bad years ‘ thereby, smoothing out any stock market volatility. But in practice this has far from come to fruition.

Earlier this week, hundreds of thousands of Equitable Life savers cheered the news that they will be able to escape the group’s £5.5bn poorly performing with-profits fund as the firm announces it is to boost potential pay-outs and scrap its exit charges.

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