In the 2011 Consultation Paper, the FSA suggested that all with-profits funds (save for those with liabilities smaller than £500m) should be required to have a with-profits committee. Although this proposal has now been dropped, the FSA believes that there is considerable merit to the suggestion that it make a with-profits committee the general rule, except for those firms whose low level of complexity makes one unnecessary (and who would retain the existing ability to use an independent person to fulfil the role). This proposal may be consulted upon in the future.
The FSA has also chosen not to proceed with the provision requiring firms with more than one with-profits fund to appoint the same with-profits committee for all of them.
The FSA has also concluded that with-profits committees do not need to be wholly independent - it believes that if committees have an independent majority, possibly with a senior independent non-executive or external person chairing the committee, then they can reasonably include internal appointments to link them more effectively to the business.
In defining independence, firms must have regard to the guidance the FSA has issued, which is in line with the Financial Reporting Council’s guidelines, including the annotated version used by mutual insurers.
The FSA has made a transitional rule, so that firms’ existing governance arrangements are deemed to comply with the provisions in COBS 20.5 until 1 July 2012.
Terms of reference and matters for consultation
The FSA proposed in the 2011 Consultation Paper, and remains of the view, that a firm should discuss the terms of reference of the with-profits committee with the FSA and publish them on the firm’s website. However, the publication rule has been relaxed for firms without a website, in particular small mutual firms; for such firms, terms should be made available on request.
The terms of reference must include a requirement for the governing body to consult with the with-profits committee in a timely manner concerning all matters the committee could reasonably expect to be consulted on. Finally, the proposal that with-profits committees should have the right to request external advice is retained, but the suggestion that such advice be provided at the expense of shareholders, has been dropped. These costs may be shared according to whether the issue under consideration is wholly or partly for the benefit of the firm rather than its policyholders.
Issues with-profits committees should consider include, but are not confined to:
- the firm’s compliance with its PPFM as currently drafted and whether the way in which the fund is run in practice is properly reflected in the PPFM;
- how conflicts of interest have been identified and managed;
- the identification of surplus and excess surplus and the merits of its distribution versus retention;
- how bonus rates and MVRs (if relevant) have been set and applied and the application of smoothing;
- any significant changes to the risk/investment profile of the with-profits fund - including the management of material illiquid investments and strategic investments;
- the impact of any planned or implemented management actions;
- the firm’s strategy for future business in the with-profits fund;
- the firm’s customer communications;
- relevant management information, such as customer complaints data;
- drafting and adherence to the distribution, management and run-off plans and court schemes as appropriate;
- the costs incurred in operating the with-profits fund; and
- any other issues the with-profits policyholders may reasonably expect the with-profits committee to scrutinise.
Interaction between the with-profits committee and with-profits actuary
The FSA had intended to add a new item to the section on conflicts of interest contained in the Supervision Manual (SUP) 4.3.17R, which would have prevented the with-profits actuary reporting or having his remuneration determined in a way that could give rise to a conflict of interest. The FSA now accepts that with-profits actuary roles tend to be part-time or combined with other roles and that it can be difficult for the individuals concerned to operate effectively while still managing their future career prospects. The FSA will revisit the rule to make it less prescriptive, such that, when a conflict of interest arises it should be identified and managed effectively.