Protecting With-Profits Policyholders
The ABI’s Response to FSA’s CP 11/5
Introduction
1.
The ABI is the voice of insurance, representing the general insurance, investment
and long-term savings industry. It was formed in 1985 to represent the whole of the
industry and today has over 300 members, accounting for some 90% of premiums in
the UK. The ABI’s role is to:
Be the voice of the UK insurance industry, leading debate and speaking up
for insurers.
Represent the UK insurance industry to government, regulators and policy
makers in the UK, EU and internationally, driving effective public policy and
regulation.
Advocate high standards of customer service within the industry and provide
useful information to the public about insurance.
Promote the benefits of insurance to the government, regulators, policy
makers and the public.
2.
The ABI welcomes the opportunity to respond to FSA’s consultation paper CP 11/5
‘Protecting with-profits policyholders’.
Overall Comments
3.
This section sets out our overall comments on the FSA’s proposals. Answers to the
specific consultation questions are in the attached annex.
4.
We agree that with-profits policyholders should be treated fairly and that high
standards of governance should be observed at all with-profits funds. However, we
are unconvinced that many of the rules proposed in this consultation are needed to
ensure this – where the FSA believe that firms are not meeting the required
standards then in many cases these could be dealt with by supervisory action under
the current rules.
5.
We are concerned that the regulatory uncertainty created by the FSA’s successive
reforms to the with-profits regime over the past few years are damaging the ability of
firms to write and manage business and is creating uncertainty for policyholders. A
stable regulatory regime is, therefore, in the best interests of both firms and
policyholders.
Fair Treatment of With-Profits Policyholders.
6.
We do not believe that it is possible for the FSA to provide guidance of the type
proposed. All with-profits funds are different (taking account of the history of the
fund and policyholders’ expectations based on established practices). These
differences mean that it is not possible to provide guidance that is universally
applicable.
7.
We do not agree with the proposed guidance in COBS 20.2.1G(2) as it may be
misleading to policyholders and does not provide a balanced view of policyholders’
interests in a with-profits fund. Assets of a with-profits fund are both legally and
beneficially the property of the insurer and policyholders do not have any proprietary
interest in these assets. The relationship between with-profits policyholders and
insurers are contractual and insurers are entitled to deal with the assets of a withprofits fund in such a manner they consider appropriate so long as they honour the
contract with policyholders taking into account applicable regulation. A policyholder
may have a contingent interest in the surplus of a with-profits fund subject to the
insurer’s (i.e. its Board) discretion, taking into account the size of the estate, the
amount necessary for current and future use and its duties under the principles of
Treating Customers Fairly. As it stands proposed COBS 20.2.1G(2) suggests that
policyholders have an interest in all parts of the fund which is incorrect and
misleading. We are concerned that this guidance could be taken as a full and
correct statement of the nature of policyholders’ interests which it is not.
8.
We are also very concerned by the FSA’s views on fairness in the mutual sector
arising from Project Chrysalis. We believe that these views fail to recognise the
specific characteristics of mutuals and fail to give proper recognition to the rights of
members (as opposed to policyholders) in the with-profits fund.
9.
Some of the FSA’s views, for example in relation to conflicts of interest, appear to
favour the interests of one group of policyholders (those in the with-profits fund) over
other policyholders which is inconsistent with the need to treat all policyholders
fairly.
Proposed Rules Changes
10.
We have concerns about a number of the rule changes being proposed in the
consultation. Details of these are set out in the annex in our responses to
consultation questions 3 to 16.
11.
We are particularly concerned about the proposals on:
a. The terms of new business: the rule will be extremely onerous on
firms as removing any materiality restriction on the extent to which
the interests of with-profits policyholders might be affected by the
writing of new business raises a very significant bar to firms’
continuing to write new business.
The requirement that ‘all’
2
appropriate analysis is undertaken is particularly onerous as it would
be very difficult for firms to demonstrate compliance with this
requirement.
b. Fair distribution and management plans: we do not agree that firms
should be required to prepare such plans where they continue to
write with-profits business. We believe that the concerns which have
prompted the FSA to bring forward these proposals will be allayed by
the improved governance of with-profits funds, and in particular the
greater role for the with-profits committee, proposed elsewhere in the
consultation.
c. Reattributions: We do not believe that these proposed changes are
necessary. They represent an unnecessary infringement of the ability
of the insurer and its with-profits policyholders to reach a mutually
satisfactory agreement on the reattribution of the estate.
d. Charges made to with-profits funds: We accept that firms should not
be allowed to set charges so as to make disproportionate profits for
shareholders at the expense of policyholders. However, we do not
agree with this proposal as it stands, when applied to established
arrangements where a service company offers a service for agreed
fees and takes on certain operational risks that are a legitimate part
of the shareholder/policyholder arrangement. As drafted this would
create an imbalance between the benefits of the service (enjoyed by
the with-profits fund) and the risk of losses through operational or
other error (incurred by the shareholder). We have particular
concerns about how this applies to intra-group fund management.
Governance of with-profits funds
12.
We agree, in principle, with most of the changes in the governance of with-profits
funds proposed in the consultation. However, we have concerns in respect of a
number of the proposals. Our detailed responses on these issues are set out in our
answers to questions 17 to 28 in the attached annex.
13.
In respect of membership of with-profit committees we support the FSA’s alternative
option whereby members of the committee can include directors and non-executives
of the firm as well as external members provided that there is an independent
majority.
14.
Those issues where we believe that some modification is needed to the proposals
include:
a. External advice: we agree that the with-profits committee should be
able to make reasonable requests for external advice. However, we
do not agree that the cost of this should necessarily be borne by
3
shareholders given that this is clearly a cost incurred in managing the
with-profits fund.
b. With-profits actuary: we agree that the with-profits actuary should
work closely with the with-profits committee but do not think that it is
appropriate for the committee to have a formal role in the
appointment of or in assessing the performance of the with-profits
actuary.
4
ANNEX
Questions for Consultation
Proposed Rule Changes
Q1: Do you agree with the proposal to include guidance setting out our view of
some of the interests of policyholders in with-profits funds?
We do not agree with this proposal.
We do not believe that it is possible for the FSA to provide guidance of the type
proposed. All with-profits funds are different (taking account of the history of the
fund and policyholders’ expectations based on established practices). These
differences mean that it is not possible to provide guidance that is universally
applicable.
The proposed guidance provides a partial and mistaken view of policyholders’
interests in the with-profits fund. In particular it makes no reference to the clear
legal position that assets of the with-profits fund are the property of the insurer and
policyholders do not have any legal or beneficial interest in them.
The absence of a clear statement of this legal position could seriously mislead
readers of the handbook as to the extent of policyholders’ and shareholders’
respective rights and interests in the with-profits fund. As it stands proposed COBS
20.2.1G(2) suggests that policyholders have an interest in all parts of the fund. We
are concerned that this guidance could be taken as a full statement of the nature of
policyholders’ interests which it is not.
We are also concerned that as drafted the guidance could be taken to override
specific interests in an estate that was set aside on a demutualisation or reattribution
for policies in force at that time.
Q2: Do you agree with our proposal to convert elements of COBS 20.2.1G into
mandatory requirements in a rule and to clarify the types of conflicts that may arise?
In principle we have no objection to the proposal to make clear that there are a
number of potential conflicts of interest that might arise in the operation of a withprofits fund rather than as is currently the case, referring solely to the potential
conflict between policyholders and shareholders. In practice firms will already
consider these potential conflicts of interest.
However, we are concerned that as drafted COBS 20.2.1A is too onerous in
requiring that firms ‘must ensure that all aspects of its operating practice are fair to
the interests of its with-profits policyholders’. This seems to go beyond the
requirements of the Principles of Business - Principle 3 (‘a firm must take
reasonable care to organise and control its affairs...’) and Principle 6 (‘a firm must
pay due regard to the interests of its customers and treat them fairly’). We would
propose amending the draft wording to say that a firm ‘must take reasonable care
that all aspects of its operating practice...’.
5
We also note that the revised rule requires particular consideration to be given to
with-profits policyholders. This could, at least theoretically, require firms to give
preference to with-profits policyholders over the interests of other policyholders in a
way which would not be compatible with the overall requirement to treat all
policyholders fairly.
We note that the redrafting of COBS 20.2.1A implies that all undisclosed benefits to
shareholders are unfair. We believe that this extension is unnecessary.
Q3: Do you agree with our proposed approach to the use of COBS 20.2.17R and to
the clarifying amendments to the definition of ‘required percentage’ that we propose
to make? Do you consider the guidance that we propose to make in this area to be
adequate and clear?
We do not believe that the rule as proposed will be appropriate in all situations,
particularly in respect of mutuals. Some firms will operate a 90:10 basis for
conventional with-profits but a 100:0 basis for unitised with-profits. Such firms will
not, therefore, have a single required percentage but will instead have several ratios
used in specific circumstances. This should be reflected in the drafting of the rule.
Q4: Do you agree with our proposal to strengthen our rule and guidance on the
terms of new business written into a with-profits fund?
We do not agree with this proposal. Whilst policyholders as a whole may have an
interest in potential future distributions from the estate, as the basis for allocating
any such distributions cannot be known with any certainty, individual policyholders
cannot necessarily expect to participate in such distributions. Given this, all that can
be said is that any individual policyholders' PRE in respect of future distributions
from the estate is greater than zero. On this basis, the impact of writing new
business on that PRE cannot be quantified and thus any change in the PRE as a
result of writing new business cannot be determined and hence this cannot feature
in any assessment of the impact of writing new business on existing policyholders.
We are also concerned that, as drafted, the rule will be extremely onerous on firms.
Removing any materiality restriction on the extent to which the interests of withprofits policyholders might be affected by the writing of new business raises a very
significant bar to firms’ continuing to write new business. We believe, therefore, that
the rule should continue to include a reference to materiality.
The requirement that ‘all’ appropriate analysis is undertaken is particularly onerous.
We are concerned that it would be very difficult for firms to demonstrate compliance
with this requirement. We do not believe that this is necessary given the requirement
for the Board to be satisfied ‘so far as it reasonably can be’ and so the word ‘all’
should be deleted.
If the rule is amended, we suggest that existing guidance 20.2.30G(1) might be
amended to explicitly allow credit to be taken for any benefit to running costs arising
from the additional business.
It is not explicitly stated that the new rules do not apply to [contractual] increments to
existing policies. We feel that it is essential to have this explicitly stated. There
6
should be no application to increments as it is inappropriate to apply any test
retrospectively and could add significantly to compliance costs.
Q5: Do you agree with our proposal that a firm should discuss with us what actions
may be required to ensure the fair treatment of with-profits policyholders if it
experiences sustained and significant falls in the volume of new business?
We agree with this proposal where a firm has suffered a permanent sustained and
substantial fall in the volume of new business.
Q6: Do you agree with our proposal to require firms to have fair distribution plans
appropriate to their reasonable/sustainable new business projections?
We do not agree with this proposal (see our comments in response to question 7
below)
Q7: Do you agree with our proposal that firms prepare, maintain and update a
management plan containing contingency arrangements in the event they
experience sustained and significant falls in new business volumes?
We do not agree with the proposals in questions 6 and 7. We believe that the FSA is
correct in its assessment that whether a fund is open or closed funds is not a binary
issue, but this observation is not reflected in the draft rules - which still very much
reflect a binary open or closed status. More particularly we believe that as drafted
the proposals are onerous and unnecessary.
Where a firm has suffered a permanent sustained and substantial fall in the volume
of new business then it would appear sensible for it to discuss this with the FSA.
However, we note that as drafted COBS 20.2.41AR would require a firm to initiate
discussions with the FSA if there was a sustained and substantial fall in the amount
of non-profit business being written in the fund even if there continued to be a
substantial amount of with-profits business being written. We also note that
20.2.41B(G)(2) suggests that a firm might be considered closed to new business if it
is not effecting a material volume of non-profit contracts regardless of the volume of
with-profits business being written. We would suggest that the focus should be on
the amount of with-profits business being written.
We agree that it is appropriate that firms should plan ahead, including looking at
various scenarios, including the possibility of a permanent sustained and significant
falls in the volume of new business. However, we think that the formal proposals in
questions 6 and 7 will be an onerous and unnecessary burden on firms which are
continuing to write significant amounts of new business. In practice these proposals
will reduce the flexibility and discretion available to manage the fund. We believe
that the concerns which have prompted the FSA to bring forward these proposals
will be allayed by the improved governance of with-profits funds, and in particular
the greater role for the with-profits committee, proposed elsewhere in the
consultation.
7
Q8: Do you agree that the with-profits funds that closed to new business before the
current rules came into effect in 2005 should have run-off plans?
We agree with this proposal. While we agree that preparing such a plan should
simply require firms to document existing plans and practices we believe that the
FSA should discuss with those firms affected the time needed to prepare such a
plan rather than require it to be produced within a set time.
The requirements of COBS 20.2.57G(1) will need to be modified as some of the
points in Appendix 2.15 of SUP are only relevant at the point of closure and so are
irrelevant to funds which are already closed.
Q9: Do you agree with our proposal to change the rule so that an MVR can be
applied only where there could otherwise be a payment in excess of the value of the
assets underlying the policy?
See our response at question 10 below.
Q10: Do you agree with our proposal to clarify our rule relating to MVRs and
distribution ratios?
We welcome the FSA’s recognition that MVRs can be a legitimate method used by
firms to balance the interests of different groups of policyholders.
We understand the intention behind the FSA’s proposal to remove the scope to
apply a MVR purely because of pressure on liquidity. We agree that insurers do not
usually suffer from liquidity problems and, therefore, that a high-volume of
surrenders would not in itself normally justify the imposition of a MVR.
We are also concerned that as drafted the rule applies to unadjusted asset shares
and believe that it should be amended to apply to smoothed asset shares. As it
stands we believe that this could be unfair to policyholders as it prevents normal
downwards smoothing on surrenders where a MVR applies.
Q11: Do you agree with our proposal that the existing guidance on strategic
investments should be strengthened into a rule and that the guidance formerly in
COB 6.12.86G (amended to take account of the new rule) should be restored?
We have some concerns with the proposed drafting of these rules and guidance:
-
The proposed revised definition of a strategic investment would cover
many assets, notably commercial property and private equity, held by
with-profits funds on normal investment grounds.
Although such
investments are likely to pass the tests in proposed COBS 20.2.36A G
(1) we believe that it would be more appropriate for the FSA to
reconsider the definition so as to catch more clearly only those
investments which could be considered genuinely strategic.
8
-
The proposed rule and guidance does not cover the action to be taken by
a firm if it concludes that a particular strategic investment should no
longer be retained. In these circumstances immediate disposal may
have more adverse effects than retention. It should be made clear,
therefore, that any consideration of whether to retain a strategic asset
should take account of the possible adverse consequences of disposal,
which may not be limited to the costs that would result from divestment.
-
We do not understand how the proposed consideration in COBS
20.2.36A(G)(1)(f) can be reliably determined and propose that this item
be dropped. Furthermore, this requirement would appear to undermine
the independence and role of the with-profits actuary which is covered by
COBS 20.2.36A(G)(1)(e).
Q12: Do you agree with our proposal to amend COBS 20.2.23R to prevent value
being extracted from a with-profits fund by other group companies making charges
in excess of their costs?
We do not agree with this proposal.
We accept that firms should not be allowed to set charges so as to make
disproportionate profits for shareholders at the expense of policyholders. However,
we do not agree with this proposal, when applied to established arrangements
where a service company offers a service for agreed fees and takes on certain
operational risks that are a legitimate part of the shareholder/policyholder
arrangement. As drafted this would create an imbalance between the benefits of the
service (enjoyed by the with-profits fund) and the risk of losses through operational
or other error (incurred by the shareholder).
In the case of service companies the margin that they earn will often do little more
than compensate for operational risk. It appears to us that it is appropriate for the
insurer to retain a margin as compensation for incurring risks that remain with the
service company. The proposals do not recognise that the practice of charging fixed
fees to with profit funds effectively removes the risk of expense overrun for the fund
and transfers it to the service company. This is a key benefit to policyholders.
In the case of asset management fees we understand that these are usually
determined on an arms-length basis and on commercial terms. We understand that
it is not uncommon for charges for investment services to a with-profits fund in a
group to be lower than charges applied to external clients (this can happen because
the volume of business provided by intra-group funds provides the asset
management division with economies of scale).
The draft rule takes no account of whether the in-house service provider will deliver
the best value for money and outcomes for policyholders in terms of service and
performance, relative to alternatives available in the market. The selection of the
‘best’ service provider, taking account of the full range of considerations appropriate
to such a selection, should be the central, overriding goal of the operator of the withprofits fund. It is reasonable to expect that any firm delivering those services will be
able to charge at an appropriate rate for its services.
9
Margins (particularly for asset management services) may well also have been
factored into benefit illustrations at point of sale or may be envisaged in business
transfer Schemes. As such these will be known to and accepted by policyholders.
Policyholders will focus on the appropriateness and quality of the services provided
and the fairness of the fees charged. On this basis, providing the fees are fair, it
should be of no consequence whether or not the service provider (be it an internal or
external provider) achieves a margin over the costs incurred in providing the service.
It is not clear that firms will, in many cases, be willing to offer these services at cost
as the FSA propose. While the FSA recognise the potential for policyholders to be
disadvantaged if firms out-source to external parties the consultation document
argues simply that it would not be in shareholders’ interests to outsource services as
the additional cost would reduce overall profits in the fund and so reduce the return
to shareholders as well as policyholders. However, this argument does not
recognise that if higher fees are paid to an external company the shareholder in a
90:10 fund would only lose one-tenth of the reduced with-profits fund surplus. The
possibility of retaining this one-tenth may well not be enough for the shareholder to
want to retain the risks associated with providing services when it cannot charge any
risk margin over costs for taking on those risks. This consideration is even more
significant for a 100:0 fund.
We believe that rather than simply prohibiting firms from charging margins on cost
that this is better addressed directly, by requiring firms to consider certain factors
when setting charges, for example:
Point of sale or subsequent benefit projections;
Established practice (e.g. a firm that has charged a very thin margin for a
long period would not be expected to significantly increase the profit
margin);
Statements made to policyholders (including PPFM); and
Market benchmarking (as an ultimate upper limit – but the other criteria may
result in lower charges).
The consultation paper does not address the issue of charging with-profits funds
that exist in firms as a result of past transfers of business. When a transfer of
business between two firms is being considered, the most common structure is that
any with profits fund in the transferor remains a ring-fenced fund or sub-fund in the
transferee. It is almost universal that Schemes of Transfer determine an expense
charging basis for the new sub-fund in the transferee. We assume that any new
FSA proposals will not seek to overturn existing Court approved expense charging
structures relating to with profit funds and so propose that charges to with profits
funds resulting from a part VII scheme, or a scheme under Section 86 of the
Friendly Societies Act, are exempt any revised requirement.
Q13: Do you agree with our proposal to remove the ability of firms to reattribute
excess surplus?
See our response to Q.14.
10
Q14: Do you agree that a firm that proposes a reattribution should, prior to that
proposal, be required to pay particular attention to identifying and distributing excess
surplus?
We do not believe that these proposed changes are necessary. They represent an
unnecessary infringement of the ability of the insurer and its with-profits
policyholders to reach a mutually satisfactory agreement on the reattribution of the
estate.
Policyholders have no legal or beneficial interest in excess surplus unless the
directors of the firm have decided to declare a distribution. Policyholders have,
therefore, no contractual entitlement to share in excess surplus nor have they
contributed to the surplus.
There are considerable safeguards in place to ensure that policyholders are fairly
treated in any questions related to the distribution of excess surplus or reattribution:
-
The with-profits committee is explicitly required (COBS 20.5.3R(2)(b)(i)) to
consider the identification of excess surplus and the firm’s distribution policy;
Where a reattribution is proposed policyholders will be represented by an
independent policyholder advocate;
Policyholders must agreed to any reattribution proposals; and
Reattribution proposals must also be approved by the Court.
These safeguards should be sufficient to ensure that policyholders are fairly treated
in a reattribution.
Q15: Do you agree that the policyholder advocate should have control over the
content of communications provided by the policyholder advocate for policyholders?
We do not believe that it is appropriate for a third party to have control of
communications with a firm’s customers. We, therefore, believe that the policyholder
advocate should generally look to agree communications with the insurer and if
agreement can't be reached then the matter should be referred to the FSA.
As drafted there is a significant danger that this proposal could lead to policyholders
being inadvertently given incorrect or partial information with subsequent attempts
by the firm to correct this resulting in greater confusion for policyholders.
Q16: Do you agree that it would be unfair for a firm proposing a reattribution to seek
to bind the minority, against their wishes, by means of the reattribution scheme?
It is not clear to us that this is a likely event given that neither of the major
reattributions in the past decade have been structured in such a way as to prevent
policyholders from retaining their rights in the post-reattribution estate.
Given the rarity of reattributions we believe that, rather than amending its rules now
in order to prevent firms from undertaking what is a legally permissible route to
11
reaching an agreement with its policyholders, the FSA should discuss whether or
not this route might be acceptable with any firm that wishes to undertake a
reattribution at the time that a reattribution is being contemplated. This would
enable the FSA to reach a decision on whether an approach that bound all
policyholders might be fair in all the circumstances of a particular case.
Governance
Q17: Do you agree that a with-profits committee should be required for all withprofits funds except small funds, and that the threshold suggested is the right one?
We are content with this proposal in relation to proprietary companies. However,
given that the Board of a mutual represents members’ interests it is not clear to us
why a with-profits committee is required for a mutual.
Where a with-profits committee would otherwise be needed we believe that the FSA
is correct to continue to allow smaller funds the option of using an independent
expert or non-executives to provide this function as smaller funds will often not have
the capacity to support a with-profits committee.
It is not, however, clear to us why the FSA is proposing that where a firm has a withprofits committee and operates more than one with-profits fund that the same
committee should cover all of the funds. This may impose an unreasonable burden
on the with-profits committee of a firm that operates many funds and could deter
individuals from becoming members of a with-profits committee. It is also not
necessarily the case that it is appropriate for all with-profits funds operated by a
single firm to be run on a consistent basis – fairness to policyholders does not
require that all funds are operated on a consistent basis but rather that the particular
circumstances of each fund are taken into account.
Q18: Do you agree that the members of a with-profits committee should be
independent and completely external to the firm whose with-profits fund(s) they are
considering?
We do not agree with the proposal that all members of a firm’s with-profits
committee need to be completely external to the firm (although if a firm wished to
have an entirely external committee this should not be prohibited). However, see our
further response to question 19 below.
Q19: Alternatively, should we continue to allow directors and non-executive
members of the governing body to sit on the with-profits committee, subject to its
having an independent majority?
Following on from our response to question 18 above, we believe that this proposal
in Q.19 should be adopted whereby directors and non-executives of the firm could
be members of the with-profits committee provided that there is an independent
majority made up of independent non-executives and external members.
The key function of the with-profits committee is to provide a challenge to
management and we believe that this may be done most appropriately by a body
12
which includes at least some of the current or former directors (executive or nonexecutive) of the firm – who will have a wider knowledge of the company’s business,
history and culture than can be provided by a committee made up entirely of people
with no other connection to the firm.
Q20: Do you agree with defining independence using the same criteria for
independence as the Financial Reporting Council’s current Code?
We believe that a definition of independence using the criteria set out in the FRC
code would be an appropriate starting point but the FSA should ensure that any final
guidance takes account of the specific nature of with-profit committee
responsibilities.
Q21: Do you agree with the proposal to have terms of reference published on the
firm’s website?
We agree with this proposal.
Q22: Do you agree that the conclusions of the with-profits committee and the
governing body’s decisions to accept or to reject those conclusions must be clearly
recorded?
We agree with this proposal. However, there is a danger that the introduction of
additional process could shift the focus of the relationship between the Board and
the with-profits committee to being more formal and bureaucratic. It is important
therefore that this proposal does not curtail informal and ongoing discussion
between the Board and the with-profits committee.
Q23: Do you agree that with-profits committees should have the right to make a
reasonable request to obtain external advice and in shareholder-owned firms
request that this is at the shareholders expense?
We agree that with-profits committees should be able to make reasonable requests
to obtain external advice.
We would, however, expect with-profits committees to be able to rely in most
circumstances on resources, including information and analysis, provided by the firm
– COBS 20.5.5R(2) requires firms to provide the with-profits committee with
sufficient resources to enable it to perform its role effectively. It is, therefore,
important to be clear about what constitutes a reasonable request in this context.
It is also not clear to us why the costs of any external advice should necessarily be
borne by shareholders. Such costs are clearly part of the cost of running the fund
and so should be borne, at least in part, by the fund. There is a danger that if such
costs are met solely by shareholders then there would be no incentive on the withprofits committee to ensure that the costs are reasonable.
13
Q24: Are these the right areas for a with-profits committee to consider and on which
to provide advice?
We agree that the list of issues in paragraph 3.23 seems to cover the right areas for
the with-profits committee to consider.
However, there is a danger that some of the items on the list could involve the withprofits committee in an inappropriate level of detail not suitable for an advisory
committee. The role of the with-profits committee should be one of overseeing work
done (or not done) by the firm, not duplicating this work. So, for example for
complaints, company management should have a process in place for reviewing
these and taking necessary action; the with-profits committee should then consider
an overview of the complaints data.
Q25: Do you agree that the with-profits committee should be able to raise issues
proactively that it thinks the governing body needs to consider?
We agree with this proposal.
Q26: Can with-profits committees or other independent persons as described
operate effectively alongside the with-profits actuary?
It is clear from the experience of firms that the with-profits actuary and the withprofits committee can and do work together effectively. We, therefore, support the
proposal that the with-profits committee should be required to discuss all major
issues with the with-profits actuary.
Q27: Is it right to introduce a notification mechanism for alerting the regulator to
significant issues where there has been disagreement?
We have no objection to this proposal. However, a definition of what constitutes
‘significant’ in this context should be provided.
Q28: Do the proposed changes for the with-profits actuary provide sufficient support
for his independence and how practical is the arrangement for setting his
remuneration?
We agree that the independence of the with-profits actuary needs to be maintained.
We do not believe that the with-profits committee should have a formal role in
assessing the performance of an in-house with-profits actuary or in assessing the
suitability of candidates for the position. The with-profits actuary is appointed by the
firm. We would be concerned that giving the with-profits committee a say in
choosing the with-profits actuary would compromise the independence of the withprofits committee by involving it in the management of the firm.
It is unclear to us how the reporting lines and remuneration of the with-profits
actuary can be set up in a way which entirely eliminates any potential conflict of
interest given that the with-profits actuary works for and operates within the
14
management structure of the insurer. In practice, therefore, any potential conflicts
will need to be managed rather than eliminated entirely and this should be
recognised in the drafting of the rules.
Other Matters
Q29: Are there any other matters that you think are relevant to this consultation?
We have no further comments.
Q30: Do you think that the CBA has identified the relevant costs and benefits and
that the costs have been appropriately estimated?
We believe that individual ABI Members are generally better placed to comment on
the CBA.
We do, however, believe that the CBA considerably underestimates the cost of
preparing distribution and contingency plans. The CBA assesses the cost purely in
terms of the cost to firms of preparing the plans. However, the proposed rules (draft
COBS 20.2.22B(G)(2) will require firms to consider publishing the plans which could
result in a significant expense.
15