United Kingdom
With-Profits Management - Delivering Fairness and Transparency - Tim Kirk
“The majority of firms did not satisfactorily demonstrate that their practices were consistent with well run with-profits businesses...potentially exposing a very significant number of with-profits policyholders to risk.” (FSA, With-Profits Regime Report, June 2010)
The FSA has published its findings from its comprehensive review of with-profits management. This focused on whether firms are treating their with-profits policyholders fairly.
We know that many firms have made good progress, but a significant number also fell short of FSA expectations and are not adequately demonstrating the practices the FSA expects from a well-run with-profits business.
The primary concerns across the industry are in relation to governance and communication with customers. In addition to these sector-wide issues, weaknesses were also identified within individual firms in relation to:
- COBS Chapter 20
- Principle 6, customer interests
- Principle 7, communication with clients
- Principle 8, conflicts of interest
FSA’s Desired Outcomes
The FSA expects firms to support the following policy outcomes:
- Governance: Policyholder interests are protected and taken into account in actions taken by the firm.
- Communication: Current and potential policyholders are provided with comprehensive, timely, and clear information to allow them to take a view on the risk and reward balance of their policy.
- Payouts: Payouts are fair and policy conditions such as MVRs are applied fairly and proportionately to ensure all classes of policyholder are treated fairly.
- Expenses: Costs charged to policyholders only reflect the costs incurred in running the fund. Any additional overheads charged to the fund are proportionate to the size and impact of the fund within the firm.
- Investments: Investments are appropriate to the fund and do not prevent policyholders from receiving fair payouts or bonus distributions.
- New Business: The terms for writing new business do not make existing policyholders materially worse off.
- Closed Funds: A coherent plans and risk management approach is in place to ensure a fair distribution of assets to all policyholders.
- Reattribution: Conflicts of interest in ownership and distribution of surplus funds are managed fairly.
Enforcement Action
“The findings are particularly disappointing in light of our previous communications to the sector” (FSA, With-Profits Regime Report, June 2010)
Many of the concerns raised by the FSA are not new, so immediate action will be expected by firms that are considered to be falling short of FSA expectations. The FSA has outlined the action expected from firms, and firms that do not meet these expectations promptly are likely to face swift sanction.
“We are intervening now and taking strong action with firms at risk of breaching our requirements to avoid the weaknesses we have identified having the opportunity to develop and cause detriment to policyholders.” (FSA, With-Profits Regime Report, June 2010)
The FSA is already undertaking enforcement investigations with firms where risks to policyholders are high and firms have failed to meet COBS 20 and principles requirements.
Action For Firms
Firms have been working to improve with-profits management for some time, but in the judgement of the FSA, performance is still not good enough.
To avoid the risk regulatory action, firms need to be challenging in assessing their ability to evidence delivery of the FSA’s desired outcomes.
There will be testing times ahead as the FSA continues to clamp down on the conduct of firms. As we move forward, the key questions for management will relate to governance, consumer communication, with-profits fund operations, closed fund specifics and reattribution.
For more information on the issues affecting with-profits management following the FSA report, please click here.