FCA reveals terms of £900bn unit-linked funds review

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FCA chief executive Martin Wheatley

Financial Conduct Authority chief executive Martin Wheatley has set out the key issues the regulator is looking to address as part of its thematic review into the £900bn unit-linked fund sector.

Speaking at an Association of British Insurers conference in London yesterday, Wheatley said the FCA review into the governance and management of unit-linked funds, first announced in January, represented one of the most important thematic reviews for life insurers.

He said the unit-linked sector was “hugely significant”, with around £902bn worth of funds under management, of which 87 per cent relates to pension business.

Wheatley said: “The question we are asking is whether these firms are acting in their customers’ best interests. Are they allocating a fair proportion of revenue received from stock – lending to the fund – or are they recycling too much to the shareholder?”

He said the review will also question whether providers of unit-linked funds are managing them in line with the stated investment objectives.

Wheatley added: “Just as importantly, are they transferring counterparty credit risk from reinsured funds to policyholders without asking them, and without obtaining their express consent to do so.”

Announcing the thematic review in January, the FSA said it had been launched to ensure sufficient protections for pension savers automatically enrolled into a unit-linked fund.

At the time the regulator’s broad outline of the review said it would assess whether firms have adequate systems and controls to ensure funds were being administered fairly and in accordance with customer expectations; that assets backing unit-linked policies are appropriate for policyholders; and that policyholder benefits are calculated fairly and accurately.

Standard Life raised concerns in February about the use of external fund links in automatic enrolment default funds, and called on the regulator to extend its review to address this.

The review is expected in the autumn.