Regulation of with-profits funds – next stage in the consultation process

CP167 represents the next stage in FSA's consultation process regarding changes to the regulation of with-profits funds. It follows-up on the two Issue Papers that FSA issued in 2002 ('Discretion and fairness in with-profit policies' and 'Governance of with-profit funds and the future role of the appointed actuary') and the two Feedback Statements issued in May 2002, which dealt with FSA's 'With-profits Review' and the future role of actuaries in the governance of life insurers.

FSA has now developed its earlier proposals in detail. Its proposals are primarily designed to improve transparency, to strengthen the governance of insurance firms (especially in the with-profits sector) and to simplify the certification of insurance returns.

The consultation paper is divided into three parts. The first part relates to the governance of with-profits business and is therefore only relevant to insurance firms that conduct such business. The second part deals with the future role of actuaries in the governance of life insurers and is relevant to all life insurers. The third part deals with consequential changes in regulatory reporting and is relevant to all insurers.

Governance of with-profits business

In chapter 3 of the paper, FSA provides an overview of its proposals to improve the governance of with-profits funds. In chapter 4, the proposals are set out in detail, which, in brief, will require firms conducting with-profits business to:

• define the Principles and Practices of Financial Management (PPFM) that they apply in their management of with-profits funds; and
• make their PPFM publicly available.

In chapter 5, FSA proposes that firms should also have to ensure that their governance arrangements offer assurance to policyholders that they have managed their funds in accordance with the PPFM they have established and published. They will have to produce annual reports for policyholders that explain how they have complied with this obligation, which will include commentary on how they have addressed any competing or conflicting rights, interests or expectations of policyholders and (for non-mutuals) shareholders.

The future role of actuaries in the governance of life insurers

In chapter 6, FSA sets out its proposals for changes to the existing rules and guidance relating to the role of actuaries as contained in the Supervision Manual (SUP). These changes include:

• discontinuing the existing appointed actuaries regime;
• introducing two new actuarial functions, both of which would be 'controlled functions' (and therefore subject to the requirements of section 340 of FSMA), namely:
  • an actuarial function for all life firms, with responsibility to advise directors and senior management on the valuation of policyholder liabilities and on wider issues, as determined by senior management; and
  • a with-profits actuary only for firms carrying on with-profits business, who will have responsibility to advise the governing body on the use of discretion; and
• introducing a new requirement for firms to avoid appointments of with-profits actuaries that give rise to significant conflicts of interest.

Consequential changes in regulatory reporting

In chapter 7, FSA proposes some significant changes to the Interim Prudential Sourcebooks for insurers and friendly societies. The proposed changes will affect regulatory reporting for all insurance firms.

The changes include:

• introducing a change in certification by directors and in regulatory reporting by management;
• broadening the scope of the audit to include the valuation of policyholder liabilities and requiring auditors to seek actuarial advice that is independent from the firm when auditing life policyholder liabilities; and
• requiring the directors of firms carrying on with-profits business to confirm that their with-profits funds have been managed in line with their PPFM.

Proposed timing of implementation

FSA expects to bring these proposals into effect during 2003 and 2004 as follows:

• the proposals relating to PPFM and the role of the actuary are to be brought into effect in the latter half of 2003;
• the regulatory reporting proposals are intended to financial years ending on or after 31 December 2003; and
• the proposals relating to governance arrangements are intended to come into effect in Spring 2004.

FSA require comments on the paper to reach them by 25 April 2003. It should be noted that some of the issues discussed in the paper will be taken forward in other publications arising from FSA's With-profits Review and the Sandler Review.

This paper is available by clicking here

For further information, please contact Simon Morris at simon.morris@cms-cmck.com or on +44 207 367 2702.