Managing with-profits funds
This guide is based on UK law. It was last updated on 28th
February 2008.
The Financial Services Authority has been monitoring the
management of with-profits funds – with mixed results.
The two main areas of concern are a lack of independent input in
the governance of funds and ineffective management of closed funds
once the company has stopped selling new policies.
In its 2008/9 business plan, the FSA says it will be following
up these concerns as part of the Treating Customers Fairly
initiative.
In addition, as part of a post-implementation review of the new
Conduct of Business Sourcebook, the FSA will be reviewing the rule
that allows firms to pay compensation to victims of
mis-selling from the inherited estate (the surplus assets
retained in with-profits funds).
This ties in with a broader inquiry into inherited estates
announced by the Parliamentary Treasury Committee on 26th February
2008.
Governance
Guidance in COBS states that a firm's governance should be
appropriate to the scale and complexity of its with-profits
business (COBS 20.3.2).
The arrangements should involve some independent judgment in
assessing whether the firm is complying with its "Principles and
Practices of Financial Management" (known as the PPFM) and
that it is addressing the conflicting rights and interests of
policyholders (and, if applicable, shareholders).
This might include establishing a with-profits committee (WPC),
asking an independent person to report to the board or to any WPC,
or (for small firms) asking one or more non-executive directors to
report to the board.
But in a thematic review carried out in 2007, the FSA
found that, in practice, independent input varied widely. Of 40
firms reviewed, only one WPC was fully independent of the board.
Four firms had virtually no independent input at all. In some
cases, the independent reviewers were executives of the firm or
involved in other work for the firm.
The FSA also found that the WPC or independent reviewer tended
to focus on compliance with FSA guidance, rather than on the
broader outcomes of treating customers fairly and managing
conflicts of interest. Reviews often took place after decisions had
already been taken and failed to provide an effective, independent
challenge to the ways in which the firm's management addressed any
conflicts.
In a letter to chief executive officers published in September
2007, the FSA put forward some ideas for improvement.
WPCs should be consulted on all significant issues (such as
investment strategy, charges and bonuses). They should consider
their role in terms of treating customers fairly as well as improve
their links to the main board. Customer confidence could also be
improved greatly if policyholders were told how their interests
were represented in the governance structure.
Closed funds
If a firm decides to stop writing with-profits business, it must
provide the FSA with a run-off plan as soon as reasonably
practicable and in any event within 3 months (COBS 20.2.53).
This does not apply to with-profits funds that closed to new
business before 30th June 2005 (when the rule came into effect),
but the FSA still expects such firms to be able to show that they
are managing funds appropriately in accordance with Principle 6
(treating customers fairly).
The FSA's 2007 review of 13 firms whose funds went into run-off
before 30th June 2005, however, found that most were unable to
demonstrate effective management. In some cases, there was no
evidence of the firm considering the management of the run-off at
all.
The FSA has warned that it expects senior management to ensure a
firm has an orderly and fair approach to the final distribution of
the fund and its inherited estate, effective control of the run-off
by appropriate governance and risk management and, finally, a
communication strategy that enables policyholders to make informed
decisions.
Failure to take prompt action to remedy any shortcomings could
result in supervisory or enforcement action.
Contact: Bruno Geiringer (bruno.geiringer@pinsentmasons.com
/ 020 7418 7306)
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