With-profits fund customers must be treated fairly, the Financial Services Authority (FSA) has told insurance companies.
The regulator has called on insurers to ensure they treat policyholders fairly, after a review of the management of with-profit funds highlighted varying standards of governance of funds.
In a letter to the industry, Sarah Wilson, FSA sector leader for insurance, explained some firms' arrangements for independent input did not involve consideration of wider issues that could affect whether policyholders are treated fairly.
"Some firms are not doing enough to provide independent input into the management of with-profits funds or are not devoting enough attention to running off closed funds," she wrote.
The FSA demands running of with-profits funds should involve independent judgement on how the competing interests of policyholders and shareholders are addressed.
Ms Wilson has also called on senior management of insurance firms to "take prompt action to address any shortcomings".
The FSA review also revealed firms are not always providing timely information to those responsible for the independent review of the management of funds.
The Financial Services Consumer Panel (FSCP) is now calling on the FSA to be tougher with insurance companies and is demanding stronger independent representation of policyholders.
"The FSA is making some progress in challenging companies to treat their with-profits policyholders fairly, but there is still some way to go. These are complicated products, and people need help to understand how to make the best investment decisions," said John Howard, FSCP chairman.
"This means having access to advice, receiving clear communications and being able to see that there is a truly independent voice to represent their interests when board decisions are being taken.
"If this is not done, consumers will yet again be left with little confidence in this sector of the market."