OREANDA-NEWS. The review of closed-fund life insurance policies by the UK Financial Conduct Authority will make these policies less profitable and could lead to more insurers attempting to sell their closed funds to specialist managers, Fitch Ratings says. Charges taken from policyholders' funds are likely to decrease and administrative costs associated with regulatory compliance will increase. The impact is unlikely to affect ratings, but the risk of increased regulatory intervention through similar investigations contributes to our negative sector outlook on UK life insurance.

The FCA review into fair treatment of long-standing customers, published today, found that charges levied on some customers were not in line with fair-treatment requirements and communication with policyholders generally needed to be improved. The FCA said further investigation is required regarding the disclosure of product charges at Abbey Life, Countrywide Assured, Old Mutual, Police Mutual, Prudential and Scottish Widows.

The review reached no conclusions on whether there have been any regulatory breaches and the investigations will not necessarily lead to disciplinary action. It is therefore too early to assess any direct impact on the firms being investigated. But if the inquiries were to result in large fines and negative press coverage the affected firms could suffer reputational damage. Negative publicity could also lead policyholders to withdraw business as they become more aware of their ability to access funds. A large withdrawal of business would be negative for insurers' long-term profitability and cash generation, as assets under management are already shrinking year on year.

The FCA stated in particular that simply ensuring the policies' contractual terms and conditions are being met is not sufficient to ensure that a firm is treating customers fairly and meeting its obligations under the authority's principles for business. Instead the FCA said firms should also be taking into account actual outcomes for customers.

We expect this to result in firms reducing or removing charges for policyholders in closed funds, as Scottish Widows did recently when it announced the scrapping of exit fees for workplace pension savers. The FCA also said many firms would need to carry out more regular product reviews and do more work to re-establish contact with customers they have lost touch with, which will increase administrative costs.

These effects will reduce the profitability of closed-fund policies, but the UK life insurance industry is strongly capitalised and not reliant on future profits to meet liabilities, so ratings downgrades are unlikely.

Ongoing regulatory scrutiny into closed funds may also increase the desire for insurers with both open and closed funds to sell their closed-fund businesses. Specialist closed-fund managers, such Phoenix and the Admin Re division of Swiss Re, would be the likely acquirers, although the amount potential buyers are willing to pay will reflect the regulatory risks the funds may still contain.