Martin Shaw, chief executive of the Association of Financial Mutuals has warned that the Financial Services Authority's stance on friendly society's use of with-profits funds will force societies to merge or demutualise in order to survive.
The FSA has sent a 'dear CEO' letter to friendly societies repeating its warning that with-profits funds cannot be used as capital.
The regulator has sent the letter following its 'Project Chrysalis' investigation into the liquidity of mutuals, following a similar letter in October last year.
Shaw (pictured) said the FSA's stance represented a 'fundamental challenge' to the business model of mutuals.
'I received a letter from the FSA...that essentially risks undermining the whole business model of our membership by saying that a with-profits policy fund that has built over a 100 years may need to be disposed of in the next ten years,' he said.
'Where you are using that as your only form of capital...that is a fundamental challenge to your business,' he said. 'The reality is that friendly societies do use it [with-profit funds] for new business but they pay it back.'
Shaw said the FSA wanted friendly societies to prove what portion of with-profits funds belonged to members and what was capital.
He added that friendly societies would have to merge, demutualise or find a new source of capital in order to survive under the FSA's requirements.
Gareth Thomas, Labour MP for Harrow West said he was deeply disturbed by the FSA's letter. 'What we have just heard about the letter from the FSA to friendly societies is deeply disturbing,' he said.
'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 which is allowing this situation to develop,' he added.
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