Scandals in insurance sector set alarm bells ringing
Time for more transparency in pricing clients' investments, writes former regulator Brendan Logue
IN THE United Kingdom the Financial Conduct Authority (FCA), launched a "themed review" of the unit-linked funds sector in early 2013.
Unit-linked funds are collective investment schemes operated by life assurance companies and are a huge financial sector in the UK, amounting to over £900bn (€1,092bn) in pension and other assets. The results of this review were published in October 2013.
The review involved 12 firms and, while the results did not find "significant systemic failures" in the sector, it did find that in three firms there were "particularly serious issues regarding whether customer benefits were being calculated fairly and accurately".
To people who are familiar with the public statements of regulators, which are normally worded very cautiously, the FCA's statement should set alarm bells ringing. In general, governance issues were identified by the FCA in 2012 as an emerging risk.
One of the greatest areas of concern to the FCA arising from the review, was the pricing of clients' units.
Three firms where the most serious issues were identified were ordered to appoint suitably qualified staff to this activity and to improve the oversight of the process.
In addition they found that there was scope for improvement in the pricing function in most of the firms in their sample.
Surprisingly the review did not give any real focus to the lack of transparency in the unit-linked sector.
Irish registered life assurance companies also operate unit-linked funds. While these life companies are regulated by the Central Bank of Ireland (CBI), the operation of the funds themselves are not subject to Consumer Protection Code regulations. Consequently the level of transparency available to investors in respect of the funds is practically nil.
Life companies are obliged by the CBI to provide investors with an "annual benefits statement", but this shows only basic information about the price of the investor's units, their total value etc.
No information is provided about the trading operations of the fund itself. Information to do with the income and expenditure of the fund during the year or a statement of its assets and liabilities at the end of the year are not provided.
The calculation of the unit price is not revealed to the investor.
Attempts by the writer to obtain details of the unit-linked fund in which he is an investor were only partly successful. In particular the life company in question refused to disclose the details of the calculation of the unit price.
When asked for a copy of the financial statements of the fund, he was told that life companies do not produce income and expenditure accounts or balance sheets for unit- linked funds.
However, he was subsequently told that in fact, the company in question does produce such accounts for funds and that they are supplied to the CBI which does not publish them. It is unclear whether or not this is the case.
The absence of transparency in the operation of unit-linked funds is troubling. Coupled with an absence of regulation of the operation of the funds and the fact that there is no market in the units, means that life companies are effectively free to calculate the price for the units of funds as they see fit.
Equally a lack of regulation means that operational costs levied by the life companies on unit-linked funds are entirely at the discretion of the company – as are the investment management charges.
All in all, this situation exposes investors and pension funds to potential abuses which may go undetected. A succession of recent scandals in the insurance sector (eg, Quinn, RSA, PPI etc) should be grounds for regulatory concerns about insurance products, at the highest level.
As it stands, life companies operating unit-linked funds which do not provide transparency to their investors appear to be in breach of the core principles of the Consumer Protection Code of the CBI.
Controls on the operation of unit-linked funds could be implemented by the introduction of regulations by the CBI, making it mandatory for life companies to provide investors with annual income and expenditure accounts and a balance sheet for their fund and showing the pricing calculation of their units.
At the suggestion of the writer the CBI is to keep this idea under consideration in respect of any review of the Consumer Protection Code.
Brendan Logue was the registrar of credit unions at the Central Bank of Ireland from 2003 to 2009