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Out-Law Guide | 21 Mar 2008 | 5:31 pm | 2 min. read
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.
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.
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 ([email protected] / 020 7418 7306)
Fintech meet up