BBC News Online has learned that The Financial Services Authority, the City watchdog, is likely to back the option of setting up with-profits review board under its plans to change the governance of with-profits funds.

Under existing regulations, directors must be fair to policyholders, but a directors' main obligation on claims on with-profits fund assets is towards shareholders not policyholders.

On Friday, the FSA published a consultation paper, listing five options, to improve the regulation of how with-profits funds are governed.

A source close to the FSA dismissed a report that it was backing statutory changes, which would oblige directors to treat policyholders claims to with-profits funds on a par with those of shareholders.

With-profits consultation

The FSA is conducting a wide-ranging review of the with-profits industry.

Part of this review is to address the disparity between shareholders and policyholders' rights over with-profits fund assets.

With-profits review boards would be independent groups overseeing the interest of with-profits policyholders within individual companies.

The source said that it would give those people backing a complete statutory change a fair hearing, but the idea of a with-profits review board was the "most viable."

Opting for review boards is likely to anger those who feel that there should be a legal obligation to prevent with-profits fund assets benefiting shareholders over endowment or pension holders.