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Investigation of zombie funds tanks insurance markets

March 31, 2014

A few days ago in Reuters: “Paper says UK watchdog to check 30mln “zombie fund” policies for rip-offs“:

Britain’s financial watchdog will announce next week that it is to check 30million policies sold between the Seventies and 2000 to determine whether customers have been exploited, a British newspaper said.

The Financial Conduct Authority’s (FCA) review, which will begin this summer, is concerned about insurers using returns from “zombie” funds – which are closed to new customers – to cover costs from other parts of their businesses, the Telegraph said on its website.

There referencing a Telegraph article: “Savers locked into ‘rip-off’ pensions and investments may be free to exit, regulators will say” by Dan Hyde:

The FCA will say that at the heart of the inquiry is an “unfairness” whereby some insurers use the returns from so-called “zombie” funds — which are shut to new customers and often neglected by existing clients — to pay bills from other parts of their businesses.

A comment from wrassebait notes high exit fees and benefits from a high annuity income:

I looked into switching out of my zombie fund a few years ago but the exit fees were just horrendous. It does have the one big advantage of a guaranteed annuity of around 8.5% which you wouldn’t get today

Nevertheless, news of the FCA action sent ripples through the markets.

MailOnline: “News of watchdog inquiry on rip-off savings schemes hits insurance company giants for £7bn” by James Salmon

The City watchdog has been accused of wreaking havoc on the stock markets …
The revelations prompted as much as £7bn to be wiped from the value of life insurance companies in early trading.

Phoenix, which specialises in running ‘zombie’ pension and investment funds which are closed to new business, lost more than a fifth of its value at one stage. The company ended the day down 11.5 per cent to 652p. Rival ‘zombie’ insurer Resolution was also one of the biggest casualties, with shares falling more than 7 per cent to 296.3p

BBC: “City watchdog accused of ‘extraordinary blunder’ over inquiry into 30m policies“:

The FCA also said it feared “zombie” funds, which are closed to new clients, were being used by insurers to pay bills from other parts of their businesses.

IBTimes: “FCA’s Martin Wheatley: Insurance Inquiry Leak ‘Was Not Our Finest Hour’” by Lianna Brinded

CityAM: “Watchdog under pressure after insurance firm fiasco” by Michael Bow and Tim Wallace:

The industry will write to the chancellor to raise “serious concerns” about the disclosure of information by the Financial Conduct Authority (FCA) regarding a review into so-called zombie life and pension policies.

TheLawyer: “FCA investigation could lead to rethink of UK insurance market culture, says Eversheds“:

Jeremy Irving, partner and insurance expert at Eversheds, … said: ‘The project being proposed by the FCA to assess 30 years of so-called “zombie insurance” is a very substantial undertaking. There are potentially significant ramifications for the insurance market.

It’s funny how the fear of the investigation is causing the market to panic a little. Markets want certainty. Zombies are the ultimate representation of uncertainty. Uncertainty like zombies, is sometime not too dangerous until you go to investigate. Then all hell might break loose. Who knows what’s hiding in those balance sheets…

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From → economics, money

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