Mutuals warn of legal action against FSA over with-profits funds - Citywire

The Association of Financial Mutuals (AFM) has warned the Financial Services Authority’s (FSA) stance on friendly societies' use of with-profits funds as capital could trigger a legal challenge.

The FSA has written to the chief executives of mutuals telling them they must wind up with-profits funds if they are no longer writing new business.

In its ‘Dear CEO’ letter, the regulator said it was concerned that the capital of closed with-profits funds would not be shared with the dwindling number of policy holders despite the fact that as members, they are owners.

FSA head of supervision Jon Pain said in the letter that with-profits funds run by mutual societies belong predominantly to members.

But mutual societies have argued that with-profits funds, which are used as working capital, do not solely belong to the policy holders.

AFM chief executive Martin Shaw (pictured) warned that this could be ‘catastrophic’ for mutuals adding that the FSA’s interpretation of the law could be challenged through a judicial review.

‘We feel that the general position adopted by the FSA is wrong,’ said Shaw. ‘The options are still open for individual firms to launch a judicial review against the FSA…it is not a route firms will go down lightly.’

‘Our argument is that it is not your reasonable expectation [as a policy holder] that all of the capital that has built up in [an] organisation over 200 years should suddenly be shared out to you and the other people who happen to have a policy today,’ said Shaw.

He added that mutual societies would be forced to merge or demutualise in order to survive due to the FSA’s stance.

Gareth Thomas MP said he was deeply disturbed by Pain’s letter. ‘What has gone wrong in terms of the way the sector is being regulated is the lack of understanding from the FSA and within the Treasury,’ he said.

Pain pointed in the letter to the statement made by then minister for corporate affairs Jonathan Evans MP in 1995 who had argued for with-profits funds to employ a 90/10 split in favour of policy holders over shareholders.

But Evans criticised Pain over the ‘selective’ use of his statement and said it did not apply to mutuals. ‘We were setting out the fact we had a shareholder interest on one side and the policy holder interest on the other, while when you are dealing with a mutual you have got…members who are also the policy holders,’ said Evans, Conservative MP for Cardiff North.