The FSA has published a Policy Statement (PS12/4) confirming its new rules on protecting with-profits policyholders, following on from the Consultation Paper (CP11/5) published in February 2011. Key points from the policy statement are set out below:
- Conflicts of interest: In accordance with the Consultation Paper, the FSA has converted current elements of its guidance relating to conflicts of interests into mandatory requirements. In particular, the new rules provide that firms must take reasonable care to ensure that all aspects of their operating practices are fair to the interests of their with-profits policyholders and must be able to demonstrate to the FSA that they have taken such reasonable care.
- Terms of New Business: In a bid to strengthen the rules and guidance on the terms of new business written into a with-profits fund, the FSA’s new rules permit new business to be written only if the firm’s governing body is satisfied, so far as it reasonably can be, and can demonstrate, that the terms on which the new business is to be effected are likely to have no adverse effect on with-profits policyholders’ interests.
- Charges to with-profit funds: In light of the concerns raised following the Consultation Paper, the FSA has parked its proposed amendment of the rules to prevent intra-group service companies from charging to their with-profits funds costs that are more than the costs such companies have incurred in operating the fund. Nevertheless, the FSA has stated that this area will continue to receive scrutiny under the existing governance regime and firms should consider this topic in connection with their compliance under the new rules surrounding conflicts of interest.
- Strategic investments: In accordance with the Consultation Paper, the FSA has introduced a new rule for a firm's governing body to demonstrate that the purchase or retention of strategic investments is likely to have no adverse effect on the interests of with-profits policyholders.
- Reattribution of inherited estates: The FSA have clarified that they would expect firms to distribute any excess surplus before they undertake any reattribution exercise. The process set out in the Consultation Paper for a firm intending to undertake a reattribution exercise has largely been adopted.
- Corporate Governance: Due to the lack of consensus in the responses received, the FSA has dropped its proposal to require all with-profits funds (save for small funds) to have with-profits committees (WPCs). The FSA has also adapted its proposal with regard to the composition of WPCs, and permits in its new rules internal appointments to WPCs, subject to the WPC having an independent majority (and potentially an independent person chairing the committee). The FSA has largely retained the Consultation Paper’s proposal for a firm’s WPC’s terms of reference to be published on the firm’s website and the proposed requirements for a clearer separation of the WPC’s recommendations and the governing body’s decisions. The proposal in the Consultation Paper that the WPC must work closely with the with-profits actuary and obtain his opinion or input as appropriate has been moved from a rule to guidance and the various proposed requirements in respect of reporting lines and the assessment of the performance of the with-profits actuary have been largely retained.
For further information, please contact:
Jacinta Lim (+44) 207 456 5678
