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MONEY COMMENT
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New plans to make 'with profits' policies easier to understand have been unveiled today by the city watchdog. The Financial Services Authority says insurers have such a large amount of discretion over how the funds are managed that policyholders could be treated unfairly. With profits policies are a form of savings account where the money is invested in a mixture of shares, bonds and property. Profits are paid back to the investor in the form of bonuses which are 'smoothed' out during the length of the policy – the idea being that the investment is protected even if the market falls. That's the theory, anyway! In fact, with profits policies are expensive and inflexible and the investor often doesn't really benefit until the very end of the term of the policy, if at all. Under the new FSA proposals, insurance firms would be required to give with-profits policyholders key information in clear and plain language on how their funds are run. They'd have to publish target ranges for payouts. Exit charges (known as market value reductions) could only be applied if the fund's value has significantly changed or if a high volume of surrenders has occurred or is expected. And insurers would also be restricted on how much they can charge any with profits funds. The FSA will be testing sample information with consumers to see if their proposals help them to understand how with-profits products work. I suspect that when they eventually realise how they work, they won't want to invest in them any more!