Why does this matter?

18.  In Chapter 2 we observed that a critical determinant of the size of an inherited estate was the uses to which that estate was put. Any use of an inherited estate that reduces that estate's size reduces the prospect of special distributions to stakeholders in the with-profits fund concerned. There are undoubtedly other factors, such as the performance of investments, but it is the uses of the inherited estate over which the firm has most control. With-profits funds are managed by life firms on behalf of policyholders, and the firms enjoy wide discretion over the use of the estate. This discretion is limited in certain instances by FSA rules, and firms have an overall commitment to treat customers fairly, but Clare Spottiswoode expressed her "surprise" at the "unusually large amount" of discretion that firms still enjoyed.[27] In this Chapter, we examine various uses of the inherited estate.

Supporting a strong with-profits fund

19.  Many life companies argue that an inherited estate is an important source of security for policyholders' investments. Prudential told us that life companies had a "regulatory requirement to continuously hold sufficient capital to withstand adverse conditions, including, in particular, large market falls … and a failure to meet this requirement would destroy consumer confidence".[28] Beyond this regulatory requirement, argued Prudential, "a strong inherited estate provides a real benefit for policyholders and helps ensure policyholders get the benefits they are expecting, even in volatile market conditions. Weaker with-profits funds, which do not have a large inherited estate, cannot offer the same levels of security and smoothing".[29] Norwich Union stated that it held more capital in its with-profits funds than the minimum FSA required, in order to "maintain a high level of confidence in our funds and ensure that they will remain strong for the long term".[30]

20.  Prudential argued that it was "not possible to run a with-profits fund prudently for the benefit of current and future policyholders without a sufficiently strong inherited estate".[31] The firm described how its inherited estate had protected policyholders in adverse market conditions:

Even in 2002, when markets crashed, provided that a policyholder's investment had been held for at least 5 years, the policyholder had access to funds up to £10,000 with no exit penalties, and those relying on regular income withdrawals were also not affected. Since 2004, the exit penalty free limit has been £25,000, again provided that the investment has been held for at least 5 years. This protection for policyholders was funded from the inherited estate, which was reduced by nearly 30 % of its value during 2002 alone.[32]

21.  The existence of an inherited estate may enable a with-profits fund to offer superior investment returns, by allowing for greater flexibility in investments, and allowing a greater exposure to higher risk, higher return, assets. Prudential argued that a weaker inherited estate would necessitate the adoption of a more conservative investment strategy, which would be expected to lead to lower returns to customers.[33] Norwich Union similarly said that their inherited estate was "required for the day-to-day running of the fund", providing protection for policyholders and that the estate enabled Norwich Union to have a higher ratio of equities and property in the funds' investment portfolios than would otherwise be the case.[34]

22.  Inherited estate plays an important role in providing security to policyholders investing in a with-profits fund. The existence of inherited estate enables the life firm to mitigate risks to its ability to meet its liabilities and guaranteed returns to policyholders. Furthermore, an inherited estate provides an important comfort blanket, enabling the fund to invest in higher risk, but potentially higher return, asset classes, which is of tangible benefit to policyholders.

Smoothing

23.  Policyholder returns from with-profits funds are generally "smoothed" to protect against market volatility. Smoothing occurs when a proportion of the investment return during good performance years is held back to ensure that a reasonable return can be paid to policyholders during years of poorer performance, insulating policyholders from potentially volatile movements in the prices of equities and property. The Actuaries' Profession described the inherited estate as a "buffer" to protect policyholders from harm in the bad times. They explained that

Over a long period there will be … bad times, and the philosophy of the with-profits funds has been that those who enjoy the years of comparative plenty will tend to contribute to the estate, whilst those who experience leaner years may benefit from its protection.[35]

Prudential noted that the smoothing of returns was "fundamental to how with-profits works as it reduces peaks and troughs in payouts and therefore helps protect the policyholder against market volatility". A strong inherited estate, in the view of Prudential, was needed to provide this protection.[36]

24.  Which? agreed that smoothing could be an appropriate use of inherited estate, but they doubted whether smoothing was actually being used to the benefit of policyholders:

We think that actually in many with-profit funds smoothing has turned out to be an illusion for many policyholders, and actually, when the markets fell slightly, policyholders ended up with large transfer penalties if they wanted to cash in their policies. So, smoothing clearly has not been delivered as many policyholders would expect. We think it is a legitimate use of the estate, but it is important to note that over the long-term the cost of smoothing will be neutral because it will be balanced by taking money out in the good years and then putting it back in in the bad years. The long-term cost to the company and to the inherited estate should be neutral.[37]

Prudential stated that their "intention is that any smoothing profits or losses should balance out over time, so that in the long run with-profits policyholders as a whole neither gain nor lose".[38]

25.  The use of inherited estate in smoothing returns to policyholders between good and bad years is clearly appropriate. An element of smoothing is one of the most attractive features of with-profits investments, and the existence of the inherited estate facilitates this. It is important that the net impact of smoothing over time should be neutral to policyholders. It would be in the interests of life firms to improve the transparency of their application of smoothing techniques. If the industry does not introduce such transparency by the end of 2008, the Financial Services Authority should use its regulatory powers to ensure that firms' provide sufficient disclosure to enable greater understanding of how smoothing has impacted on policyholder returns over various time periods.

Underwriting new business

26.  The FSA allows firms to use their inherited estate to provide capital to back new business in a with-profits fund where "this does not have a material adverse effect on the interests of existing policyholders".[39] This underwriting of new business can be used to defray some of the administrative, commission and set-up costs over the initial period of the policy. The FSA considers such underwriting as acceptable provided the business is managed with a view to recovering those costs over a "reasonable period", understood as "at most the lifetime of the product that is being sold".[40]

27.  The underwriting of new business affects the distribution of benefits from the inherited estate between generations of policyholders. Mr Hodges stated that the underwriting of new business was "about the recycling of capital between generations of policyholders. That is something that all policyholders during the fund benefited from and future policyholders may well benefit from as well." He confirmed that Norwich Union's intention was always to make sure that any capital put up to back new business was repaid over the term of the policy.[41] Mr Prettejohn also thought it an important feature of Prudential's life fund that it was "dynamic",[42] and the FSA agreed that "capital recycling" was an intrinsic feature of with-profits business.[43]

LOSS LEADERS

28.  Ms Spottiswoode viewed the "subsidisation of an insurance company's new with-profits business" as one of the most controversial uses of inherited estate, because it had "the potential to reduce greatly the amount that current policyholders can expect to be distributed from an inherited estate".[44] She accepted that new business should be funded if it was expected to be profitable but disapproved of life firms writing business using policyholder capital "as a subsidy" for future policyholders.[45] Which? argued that life firms would have an incentive to write subsidised or loss-making new business from the inherited estate, if allowed, because shareholders would not bear any of the cost of this new business, which would be borne instead by the inherited estate. Shareholders would therefore be insulated from any losses incurred. Those shareholders would, however, see the benefits from this new business in the form of their 10% share (in the case of a 90:10 fund) of the bonuses applied to these new policies.[46] The FSA told us that the volume and pricing of the new business was important, and that their rules did not permit the marketing of loss leaders or a firm to persist in marketing products where actual volumes experienced were insufficient to justify costs.[47] Mr Vicary-Smith, the Chief Executive of Which? argued that because life firms were not allowed to fund loss-making business, there was an incentive for firms to overestimate the returns that they might get from such new business in order to justify its underwriting from the inherited estate.[48]

THE CONTEXT OF A REATTRIBUTION

29.  Ms Spottiswoode was particularly concerned about the impact of the funding of new business from an inherited estate in the context of a reattribution.[49] She argued that if a firm retained a large amount of capital for the funding of new business, thus "gifting" that portion of the estate to future beneficiaries of the inherited estate, policyholders' expectations of receiving distributions before their policies matured would be reduced significantly. In a reattribution, the firm would then only need to offer policyholders a reduced payment, to compensate them for their reduced expectations of distributions. Following a reattribution, the future beneficiaries of any distributions following the reattribution would be shareholders. Ms Spottiswoode argued that shareholders would obtain the future policyholders' estate "for free".[50] A firm undertaking a reattribution process would have an incentive to maximise the funds set aside for new business, and to forecast "over-ambitious" levels of new business. This element of discretion on the part of the firm, argued Ms Spottiswoode, made the question of future new business a contentious issue which complicated negotiations between the policyholder advocate and the company.[51]

30.  Which? shared the concerns of Ms Spottiswoode that the incentive to subsidise unprofitable new business was maximised in firms considering a reattribution of their inherited estate.[52] Which? referred to the AXA reattribution in 2000 as a case in point:

Eight years ago in the AXA case, AXA projected that levels of new business in their with-profits fund would grow at 4.5% a year up to 2050. Which? believed this was far too optimistic. At the time of the AXA case, our expert witness forecast that a middle scenario would be for AXA's new with-profits business to fall by two-thirds in real terms. Despite our objections, the FSA concluded that AXA's "assumption is not unreasonable". The actual outcome was that with-profits sales by AXA are now just a small fraction of what the company had projected. According to our calculations based on AXA's FSA returns they are 85% below where AXA had predicted.[53]

Mr Vicary-Smith said that the result of AXA's over-optimistic forecast for new business recruitment was that "a lot of business was written out of the inherited estate, paid for by those policyholders, which actually turned out to, in effect, be loss-leading business".[54]

31.  The Financial Services Consumer Panel (FSCP) argued that after a reattribution the FSA should check that a company follows the strategy for new business under which reattribution negotiations were conducted.[55] According to the FSCP, the FSA had said that it expected firms to limit post-reattribution distributions to shareholders, although the FSCP did not know how that might be achieved.[56] If the proposed Norwich Union reattribution goes ahead, shareholders would be unable to benefit from a distribution from the inherited estate for six years, which Mr Hodges said was "to try and ensure that we are incentivised to write new business".[57]

32.  When considering a firm's assumptions surrounding its ability to recruit new business, an important factor would be the prospects for the with-profits industry as a whole. The Office of Fair Trading (OFT) reported data from the FSA which showed that the number of new with-profits policyholders in 2006 numbered approximately 340,000 compared with over five million in each of the years 1996 and 2001. The OFT attributed this declining popularity to low returns and low consumer confidence resulting from mis-selling scandals.[58] Which? gave a number of reasons for the continued decline of the market for with-profits products:

• "The significant number of consumers who have had a negative experience from with-profits products and the associated publicity surrounding cases such as pension mis-selling, endowment mortgage shortfalls, closed with-profits funds and Equitable Life;
• The opacity of with-profits products has contributed to a lack of confidence amongst consumers. This leads to a mood of suspicion that they are not getting a fair deal;
• Continued competition from ISAs and open-ended investment companies;
• Fundamental questions about the low profitability of with-profits products;
• Changes to the taxation of investment bonds: The recent changes to Capital Gains Tax in Budget 2008 mean that these structures in which many with-profits products are sold are less attractive for some higher rate taxpayers; and
• A survey by the Association of Financial Advisers in February 2008 found that 87% of financial advisers no longer recommend that clients invest in with-profits business."[59]

33.  Ms Spottiswoode had asked industry experts for advice on likely trends in the with-profits market in the future. That analysis suggested that with-profits policies would continue to appear unattractive to potential purchasers compared with other financial products, and that a continuing fall in with-profits sales was more likely than a recovery.[60] Mr Hodges was more upbeat about the industry's prospects, saying that Norwich Union believed that the with-profits investment product "has a good future".[61]

34.  The funding of new business from the inherited estate represents an intergenerational transfer from current policyholders to the future beneficiaries of the inherited estate. By the same token, current policyholders benefit from such transfers made prior to their investment in the with-profits fund, and this capital recycling has been a common feature of with-profits funds. However, this recycling causes particular problems during reattributions because the future beneficiaries of this intergenerational transfer will be shareholders, who have (through the firm's managers) discretion over both the strategy and portion of the inherited estate to be put aside for the funding of new business. A firm has a clear incentive to maximise the amount set aside for the funding of new business prior to a reattribution, even if that new business might prove to be loss-making. The Financial Services Authority does not permit the funding of loss-making business, which gives firms the incentive to make over-ambitious forecasts. In this context, it is vitally important for the Financial Services Authority to conduct rigorous assessment of the reasonableness of assumptions made by the firm during reattribution negotiations, ensuring that these assumptions reflect the trend of the declining popularity of with-profits products. Once a reattribution has been completed, firms should not be permitted simply to distribute (to themselves) set-aside funds intended for new business. The Financial Services Authority has indicated that such distributions will be limited, and we expect it to set out how this would be achieved in its response to this Report.

IMPACT ON COMPETITION

35.  Which? believed that the FSA's policy of allowing the use of the inherited estate to underwrite new business distorted competition and deterred innovation.[62] Which? referred to the Sandler Review of long-term savings which found that:

The existence of inherited estates distorts competition, since certain providers, not necessarily the most efficient ones, have pools of capital which have arisen for a variety of historical reasons and can be used to subsidise various activities.[63]

Ms Spottiswoode agreed with Which?:

It is no surprise that most businesses do not choose to write with-profits business, because if you do not have an estate why would you write with-profits business when you have got a competitive disadvantage from doing so? You will write other products. I think there is clear evidence that there is anti-competitiveness in the with-profits business and it is there because of the way the estate can be used to subsidise new business.[64]

36.  Norwich Union disputed the suggestion that the presence of an inherited estate represented an unfair competitive advantage, reasoning that, if the ownership of inherited estate was an unfair competitive advantage "then you would expect everyone investing for the long term to buy a with-profit policy from insurers with an inherited estate, but this is simply not happening".[65]

37.  The FSA stated that it had "seen no evidence that the uses of assets of with-profits funds that we permit give rise to any adverse competition issues", and highlighted the fact that the fastest growing areas of life assurance firms' business was non-with-profits (funds which do not have inherited estates). In 2006, according to the FSA, only 5% of all new life and pensions business was in with-profits.[66] The FSA and Which? had both asked the Office of Fair Trading (OFT) to investigate the competition implications of inherited estate.[67] The OFT told us that it had conducted preliminary analysis which had found that:

Inherited estates and the various uses that with-profits companies make of them do not significantly distort competition in the relevant market, whether the markets are narrow markets for with-profits products and non-with-profit product separately or a wider one encompassing both types of products.[68]

The OFT's conclusion rested on two arguments. First, the opportunity cost for with-profits companies of using their inherited estate was no different from the opportunity cost of using the working capital set aside by non-with-profits competitors. Second, inherited estates had not increased significantly, nor had regulatory restrictions on their use decreased, from 20 or so years ago, when entry into the with-profits market by new competitors did occur.[69] The OFT commented that "even if new with-profits policies were being subsidised by inherited estates … this strategy is not being successful",[70] citing the declining popularity of with-profits policies in recent years, which had been mirrored by a rise in popularity of other similar products. In the OFT's view, the declining popularity of with-profits products was likely to be a greater barrier to entry of new firms than the presence of inherited estates in incumbent firms.[71]

38.  Mr Christopher O'Brien, one of Ms Spottiswoode's expert advisers, suggested that the OFT's analysis had "understated a number of issues". Amongst these issues was the ability of with-profits firms to use an inherited estate to fund new business, mis-selling compensation claims and shareholder tax. Non with-profits firms would not have a similar source of funding for these costs. He argued that the ability of firms to charge such costs to inherited estate therefore distorted the market.[72] Which? raised similar points in relation to the OFT's evidence, leading them to conclude that "as a result we do not think that it has conducted a fair and reliable assessment of the competition impacts of inherited estates".[73]

39.  We note that the Financial Services Authority was unaware of any evidence that the use of with-profits funds' assets gave rise to competition concerns, and the similar findings of the Office of Fair Trading's preliminary analysis. Whilst welcoming this reassurance, the continuing concerns raised by some witnesses deserve full analysis and we urge the Office of Fair Trading to consider performing a more thorough analysis. As a minimum we expect the Office of Fair Trading, alongside the Financial Services Authority, to monitor the competition aspects of the funding of new business from inherited estates on an ongoing basis.

Mis-selling compensation costs

40.  Where life firms have been involved in mis-selling with-profits products to policyholders, the firm is likely to be punished by the FSA with a fine and ordered to pay compensation to the policyholders affected. The FSA's rules do not allow firms to charge the costs of mis-selling fines to their inherited estate, but do currently permit the charging of compensation costs arising from mis-selling to the inherited estate, on the basis that with-profits policyholders share in both the gains and losses arising from the business in the long-term fund.

41.  Nikki Maynard, Prudential's Director of Strategic Projects, argued that policyholders should bear 90% of the losses arising from the business of a 90:10 with-profits fund, just as they would share in 90% of the profits. For shareholders to bear 100% of the cost on a business where they only received 10% of the profits, she argued, would seem unfair.[74] Mr Vicary-Smith said that the argument put forward by Prudential made him "very angry",

because mis-selling costs are not normal costs, they are not the price of doing business, they are a fine imposed, if you like, for a corporate failure, and to enable them to be paid out of the inherited estate and not borne by shareholders is, to my mind, equivalent to allowing people to commit a crime and avoid a fine. It is actually not reasonable and not fair that people can engage in mis-selling and then avoid the consequences of that by paying it out of a different pot.[75]

Which? argued that mis-selling was caused by corporate failure, and allowing shareholders to avoid responsibility for the costs of mis-selling by charging the inherited estate went against all principles of good corporate governance.[76] In Mr Vicary-Smith's view, "the only way that firms will be discouraged from mis-selling is if the costs associated with mis-selling are borne by shareholders, and then shareholders will force them to take action not to mis-sell".[77]

42.  Mr Prettejohn said that, in Prudential's case, the firm had made an undertaking that mis-selling costs "would not affect the future bonus payouts and the investment policy of the fund" for the relevant generation of policyholders. Therefore, continued Mr Prettejohn, the expectations of policyholders would not change as a result of mis-selling costs.[78] Prudential had taken £1.6 billion from their inherited estate to pay compensation (and associated administration) costs relating to mis-selling.[79] We suggested to Prudential that reducing the inherited estate by £1.6 billion to pay compensation costs would mean that policyholders would have less prospect of a distribution from the inherited estate. As Which? pointed out, every pound taken out of the inherited estate reduces the amount available for potential distribution.[80] Ms Maynard denied that policyholders had any such expectations:

With-profits business is in and of itself an intergenerational play, because what we are doing with smoothing is smoothing out the volatility of the markets over time so that you will have transfers in and of themselves from people who have been in the fund in good years to people who have been in the fund in less good years, and therefore no one generation of policyholders would have any particular expectation on the estate of getting any pay-outs from the estate because the estate is there for the long-term use of the fund. In no way have we charged current policyholders with anything; indeed, we have maintained their expectations by saying that we would do nothing different in the management of the fund, notwithstanding the fact that these costs have been borne.[81]

Nevertheless, one might argue that, if the inherited estate were £1.6 billion larger than it currently is, a special distribution of some magnitude might have been possible. Under the FSA's rules, firms have to assess whether there is an excess surplus in the inherited estate on an annual basis. Current policyholders would stand to gain from such a distribution, if one were made. Mr Prettejohn said that the position was not so clear cut: "I think it would depend on all of the other factors surrounding our assessment of the financial condition of the fund. It is difficult to take one isolated element of the calculation of the size of the fund to make that judgment."[82] He insisted that policyholder expectations were instead "centred on whether or not they are getting the investment performance that they were being led to believe they would get and whether they will get the protection against volatility in the equity and capital markets that with-profits products provide".[83]

43.  Norwich Union told us that it had so far paid £183 million from the inherited estate for mis-selling compensation claims, with a further £80 million reserved for future claims.[84] Mr Hodges denied that those funds would otherwise have been available for distribution to policyholders:

It goes back to the issues of looking at the other factors to do with the fund performance and looking at where in a range we feel it is appropriate for the inherited estate that we require as working capital to sit. So I think it is too simplistic to assume that that money would have gone into the distribution … I think you have to be absolutely clear that no policyholder has paid; the policyholders' expectations around their individual policies have been protected. This has come from the inherited estate. The argument assumes that the amount of money that we need in the inherited estate in terms of working capital is so precise that any additional mis-selling would automatically flow through, and that is just not true.[85]

44.  Ms Spottiswoode offered a nuanced view of charging mis-selling compensation costs to the inherited estate:

I think there is some mis-selling that [is] part of running the business, and so I think some mis-selling … is kind of okay to charge to the estate because this … is supposed to be the mutual running of the business, profitable or not, and there … will be some mis-selling that happens just in the nature of the beast. If, however, it is systemic mis-selling where shareholders have got a moral hazard, where they have got a conflict of interest, where they think that they can charge the estate and not [charge] shareholders, there was clearly an issue there, and so I think it all depends. I think there is a real case for looking at mis-selling, but it is not quite as black and white as sometimes it is portrayed.[86]

Norwich Union's view was that the mis-selling did not represent systemic failure; it was not a fine and therefore it was appropriate that the inherited estate should be used.[87]

45.  In the light of the strength of views against the charging of mis-selling compensation costs to inherited estates, the FSA issued a consultation paper in June 2008 proposing to disallow such charges.[88] This paper stated that the FSA did not believe that the existing rules provided sufficient incentive for proprietary firms to address failures of systems and controls, and, as a result "with-profits policyholders may not be treated fairly". The FSA now takes the view that shareholders alone should bear the risk of such management failures.[89]

46.  We view the charging of mis-selling compensation costs to the inherited estate as inappropriate. All businesses make mistakes and some residual level of mis-selling may be in the "nature of the beast", for which charging the inherited estate may be justifiable. But the vast bulk of mis-selling costs must be borne by shareholders, as it is the duty of shareholders, through the managers of the firm, to ensure that staff behave appropriately when selling products. We are unconvinced by the argument that the charging of mis-selling compensation costs to inherited estates has no impact on the likelihood of current policyholders receiving special distributions. Any use of an inherited estate that reduces the estate's size has a direct bearing on such a prospect. We therefore welcome the publication of the Financial Services Authority's consultation paper on this issue, and the fact that the Financial Services Authority also believes that the charging of mis-selling compensation costs to the inherited estate is inappropriate.

Shareholder tax

47.  When a special distribution is made from a with-profits fund, the firm incurs a corporation tax liability (at a rate of 28%) on the share of profits attributable to shareholders.[90] Some, but not all, life firms are permitted to charge this tax liability to their inherited estate, prior to the distribution, thus reducing the size of the distribution to policyholders, or, alternatively, the size of the residual inherited estate.

48.  Which? said that "effectively, they [life firms] are using money which would have gone to policyholders to pay the shareholders' tax bill".[91] Which? reported that policyholders gained less than 90% of the special distribution announced by Norwich Union in February 2008 as a result of the shareholder tax rule: "In addition to the £230 million payment to shareholders, an additional shareholder tax bill of £40 million will be charged to the inherited estate. The equivalent gross split between policyholders and shareholders might be equivalent to 88:12, rather than the 90:10, which is required by the policyholder's contract".[92] Norwich Union disputed that the effect of charging shareholder tax to the inherited estate was to subsidise the insurer's corporate activity or the shareholder's return. Instead, they argued, it was "to ensure that the insurance company's shareholders actually receive their 10% share of distributions".[93]

49.  The FSA prohibits companies from charging shareholder tax to the inherited estate, unless it was the firm's established practice to do so, and the practice was disclosed in the firm's Principles and Practices of Financial Management (PPFM) document.[94] In explaining why the FSA had different rules for different companies, Mr Sants, the FSA's Chief Executive, acknowledged that this was a "tricky question", but defended the FSA's position as the right judgement "in the round". He argued that it would be wrong to disallow the charging of shareholder tax for those firms that currently do so, because this would constitute retrospective regulation:

We absolutely acknowledge here we have an approach for those who have already declared it is custom and practice and for those who do not have it as custom and practice. This is clearly a difficult judgment. I absolutely respect that there are different views that could be taken on this. We tried to make a judgment in the round. I would come back to the general comments I have made about the fact that we are trying to make judgments in the round. We are also recognising that as a regulator we try not to make retrospective judgments. That is another good principle of regulation, you do not act retrospectively unreasonably. It is in that context we have reached the view that we have reached on tax.[95]

The FSA described its decision to permit those firms already charging shareholder tax to the estate to continue doing so as a "concession" in a 2004 consultation paper.[96] Which? argued that the FSA's position was "utterly illogical":

If something is wrong, and they [the FSA] believe now, it seems, that it is wrong because they are not allowing people to do it, then [allowing] people to do it because they have done it in the past strikes me as a curious twist of logic. If it is wrong, it should not be allowed. If it is right, it should be allowed and it should be allowed for everybody; some people should not be treated differently from others.[97]

Ms Spottiswoode supported the view that the charging of shareholder tax was either appropriate, or it was not—it could not be both.[98] She was opposed to the use of inherited estate to pay shareholder tax and urged the FSA to consult on the issue.[99]

50.  The charging of shareholder tax to the inherited estate is, in our view, a striking example of how certain life firms are able to use their discretion in a way that furthers shareholder interest to the detriment of policyholders. This tax liability is only incurred as a result of shareholder involvement in the with-profits fund (no such liability would arise in a mutual fund, for example), so it seems unfair that policyholders should pay anything towards this charge. It would seem that the FSA shares our view, given that firms in general are disallowed from charging the estate shareholder tax, unless they have been doing it in the past. In the case of the charging of shareholder tax to inherited estate, different rules apply to different firms, providing yet more complexity. We believe consistency in regulation is paramount. We urge the FSA to consult on the charging of shareholder tax to the inherited estate by the end of 2008. Our view is that it should not be permitted.

28   Ev 93 Back

29   Ibid. Back

30   Ev 86 Back

31   Ev 93 Back

32   Ev 93 Back

33   Ibid. Back

34   Q 172 Back

35   Ev 93 and 131  Back

36   Ev 93 Back

37   Q 7 Back

38   Ev 100 Back

39   Ev 80 Back

40   Ev 80; Qq 99-101 Back

41   Q 165; Ev 132 Back

42   Q 167 Back

43   Ev 80 Back

44   Ev 57 Back

45   Q 50 Back

46   Ev 45 Back

47   Ev 61 and 80 Back

48   Q 8 Back

49   Ev 55 Back

50   Ev 56 and 57 Back

51   Q 46 Back

52   Ev 46 Back

53   Ibid. Back

54   Q 8 Back

55   Ev 144 Back

56   Ev 145 Back

57   Q 245 Back

58   Ev 111 Back

59   Ev 50 Back

60   Ev 57 Back

61   Q 243 Back

62   Ev 46 Back

63   HM Treasury, Sandler Review of Medium and Long term savings in the UK, July 2002, paras 10.113-10.114  Back

64   Q 51 Back

65   Ev 86 Back

66   Ev 81 Back

67   Q 10; Ev 81 Back

68   Ev 108 Back

69   Ibid. Back

70   Ev 107 Back

71   Ev 114 Back

72   Ev 168  Back

73   Ev 163 Back

74   Q 184 Back

75   Q 12 Back

76   Ev 47 Back

77   Q 13 Back

78   Qq 179-180 Back

79   Qq 181-182, 184 Back

80   Ev 45 Back

81   Q 185 Back

82   Q 246 Back

83   Q 248 Back

84   Q 251 Back

85   Qq 252, 254 Back

86   Q 55 Back

87   Q 186  Back

88   Ev 81 Back

89   FSA, With-profits funds-compensation and redress, Consultation Paper CP08/11, June 2008, para 1.4 Back

90   No such liability arises in mutual with-profits funds Back

91   Ev 47 Back

92   Ibid. Back

93   Ev 86 Back

94   See paras 88-91 for discussion of PPFM documents. Back

95   Q 108 Back

96   FSA, Treating with-profits policyholders fairly, Consultation Paper CP 04/14, August 2005, Annex 4, p 4 Back

97   Q 15 Back

98   Q 58 Back

99   Qq 54, 57 Back