Proposals aimed at improving the transparency and management of with-profits investments have been attacked by a consumer group as "naive" and "pathetic".

The reforms we propose will bring about that much-needed transparency

Sir Howard Davies, FSA chairman

The Financial Services Authority (FSA) has made a number of proposals aimed at improving consumer understanding and the treatment of policyholders.

But the Consumers' Association told BBC News Online that while the planned reforms could help consumers, they would do little to improve policyholders rights, and said that the insurance industry had been "let off".

Millions of savers in the UK hold with-profits investments in the form of endowments, personal pensions and other savings products.

The review into the �350bn ($510bn) industry was launched in February 2001, following widespread concern over the transparency of these products, their sale and management.

What are they?

With-profits investments are "collective" savings products run by life insurers.

Investors' money is pooled together, and returns are paid in the form of bonuses, typically paid each year and then in the form of a terminal bonus when the policy matures.

I think the FSA has been pretty pathetic and naive in their approach

Mick McAteer, Consumers' Association

In theory, investment returns are supposed to be guaranteed by a "smoothing" effect. In good years, insurers should hold back some money for years when investment returns are low.

But the recent poor savings environment has exposed the fragility of some of these funds - and led to questions about their management.

Many insurers have slashed bonuses, and millions of endowment holders have been warned that they may not be able to pay off their mortgages.

Policyholders with Equitable Life have been among the worst hit, after the insurer could no longer guarantee payments.

Most people who take out with-profits investments have only a basic understanding of how they work, according to a survey by the FSA, published in January 2002.

Insurers 'let off'

Sir Howard Davies, chairman of the FSA, said there was a "clear need to maintain a robust regulatory regime for the benefit of both existing and future policyholders".

He added: "The reforms we propose will bring about that much-needed transparency and help significantly to rebuild confidence in with-profits funds."

But Mick McAteer, senior policy adviser at the Consumers' Association told BBC News Online that he thought the changes would do little to improve the rights of with-profits investors.

He said: "I think the FSA has been pretty pathetic and naive in their approach. I think they have been frightened off."

Mr McAteer said that the FSA had failed to tackle the main issues of failing to curb directors' power and resolve the issue of "ring fencing" policyholders assets.

It is a win-win for consumers

Association of British Insurers

"This calls into question the approach of the FSA generally. They can't seem to see what the problems are."

A spokesman for the FSA defended its proposed reforms in response to Mr McAteer's comments.

He said: "I don't think we are working against consumer interests. What we are proposing is a rational and pragmatic approach that will actually work for the benefit of consumers."

A spokesman for the Association of British Insurers (ABI), the insurance trade body, welcomed the report.

"It is a win-win for consumers. Many of these proposals were put forward by us last year in our submission to the FSA."

What are the proposals?

Proposals published by the FSA, include:

• Creating a better understanding of how with-profits funds are run.

• Recommending firms set up With-Profits Fund Committee aimed at ensuring that the interests of with-profits policyholders are taken into account.

• Clearer information, before sale on the nature and risks of their investment, and, after sale, on how it is performing.

• Improved access to clearer and more comparable information on the financial condition of companies and their with-profits funds, including the ability to meet discretionary payments such as terminal bonuses.

• A more open and transparent process for ensuring that policyholders' interests are represented when the re-attribution of an inherited estate is considered.

• Firms should define and publish the Principles and Practices of Financial Management that are applied in the management of with profits funds and to report annually to policyholders on their compliance with the principles and practices.

• Plans for a clearer and more directly comparable presentation of information on the solvency of with-profits funds and their ability to meet guaranteed benefits.

• A requirement for firms to provide new information to help assess their ability to meet guaranteed and discretionary bonuses, including terminal bonuses, at an individual fund level.

• Enhanced disclosure requirements, based on a 'tiered' approach with core information available to all consumers and supplementary information available on request.

• Improvements to the information provided to customers after a product has been sold.

• New guidance on a more open process for handling the re-attribution of inherited estates.

• Proposals to limit the power of insurance firms' actuaries in setting bonus rates for policyholders.

Probe launched

Sir Howard called for the with-profits industry to "put its house in order" in February 2001.

What is the FSA's role?

Maintain market confidence Promote public understanding of the financial system Protect consumers Fight financial crime

"The funds are opaque, with investors getting little information about how their money is invested, or about the nature of the risks to which they are exposed," he said.