Introduction

(1) With-profits business, by virtue of its nature and the extent of discretion applied by firms in its operation, involves numerous potential conflicts of interest that might give rise to the unfair treatment of policyholders. Potential conflicts of interest may arise between shareholders and with-profits policyholders, between with-profits policyholders and non-profit policyholders within the same fund, between with-profits policyholders and the members of mutually-owned firms, between with-profits policyholders and management, and between different classes of with-profits policyholders, for example those with and without guarantees. The rules in this section address specific situations where the risk may be particularly acute.1

(2) With-profits policyholders have an interest in the whole and in every part of the with-profits fund into which their policies are written and from which the amounts payable in connection with their policies are to be paid. Those amounts include those required to satisfy their contractual rights and such other amounts as the firm is required to pay in order to treat them fairly (including but not limited to the amounts required to satisfy their reasonable expectations).1

(3) The fair treatment of with-profits policyholders requires the firm's pay-outs on individual with-profits policies to be fair (see COBS 20.2.3 R et seq.) and, if the firm makes a distribution from the with-profits fund into which their policies are written, the receipt by the with-profits policyholders of at least the required percentage (see COBS 20.2.17 R).1

(1) 1Notwithstanding that there may not be a rule in the remainder of this section addressing a particular aspect of a firm's operating practices, firms will need to ensure that they take reasonable care to ensure that all aspects of their operating practice comply with COBS 20.2.1A R.

(2) For the avoidance of doubt COBS 20.2.1A R does not exhaust or restrict the scope of Principle 6. Firms will in any event need to ensure that their operating practices are consistent with Principle 6.

Amounts payable under with-profits policies

Amounts payable under with-profits policies: Maturity payments

(1) Unless a firm cannot reasonably compare a maturity payment with a calculated asset share, it must:

(a) set a target range for the maturity payments that it will make on:

(i) all of its with-profits policies; or

(ii) each group of its with-profits policies;

(b) ensure that each target range:

(i) is expressed as a percentage of unsmoothed asset share; and

(ii) includes 100% of unsmoothed asset share; and

(c) manage its with-profits business, and the business of each with-profit fund, with the aim of making on each with-profit policy a maturity payment that falls within the relevant target range.

(2) Unsmoothed asset share means:

(a) the unsmoothed asset share of the relevant with-profits policy; or

(b) an estimate of the unsmoothed asset share of the relevant with-profits policy derived from the unsmoothed asset share of one or more specimen with-profits policies, which a firm has selected to represent a group, or all, of the with-profits policies effected in the same with-profits fund.

(3) A firm must calculate unsmoothed asset share by:

(a) applying the methods in INSPRU 1.3.119 R to INSPRU 1.3.123 R;

(b) including any amounts that have been added to the policy as the result of a distribution from an inherited estate; and

(c) subject to (d), and where the terms of the policy so provide, adding or subtracting an amount that reflects the experience of the insurance business in the relevant with-profits fund; but

(d) if a with-profits fund has suffered adverse experience, which results from a firm's failure to comply with the rules and guidance on treating with-profits policyholders fairly (COBS 20.2.1 G to COBS 20.2.41 G and COBS 20.2.53 R to COBS 20.2.60 G), that adverse experience may only be taken into account if, and to the extent that, in the reasonable opinion of the firm's governing body, the amount referred to in (c) cannot be met from:

(i) the firm's inherited estate (if any); or

(ii) any assets attributable to shareholders, whether or not they are held in the relevant with-profits fund.

Amounts payable under with-profits policies: Surrender payments

(1) the firm's unrecovered costs, including any financing costs incurred in effecting or carrying out the surrendered with-profits policy to the date of surrender, including the costs that might have been recovered if the policy had remained in force;

(2) costs that would fall on the with-profits fund, if the surrender value is calculated by reference to an assumed market value of assets which exceeds the true market value of those assets;

(3) the firm's costs incurred in administering the surrender; and

(4) a fair contribution towards the cost of any contractual benefits due on the whole, or an appropriate part, of the continuing policies in the with-profits fund which would otherwise result in higher costs falling on the continuing with-profits policies.

(1) the market value of the with-profits assets in the relevant with-profits fund is, or is expected to be,1 less than the assumed value of the assets on which the face value of the units of the policy has been based;1 and1

(2) 1the market value reduction is no greater than is necessary to reflect the impact of the difference in value referred to in (1) on the relevant payment out to the policyholder.1

Conditions relevant to distributions

(1) not make a distribution from a with-profits fund, unless the whole of the cost of that distribution can be met without eliminating the regulatory surplus in that with-profits fund; and1

(2) ensure that the amount distributed to policyholders from a with-profits fund, taking into account any adjustments required by COBS 20.2.17A R,1 is not less than the required percentage of the total amount distributed1.1

(1) 1Where a firm adjusts the amounts distributed to policyholders, either by market value reduction or otherwise, in a way that would result in a distribution to policyholders of less than the required percentage, taking both the relevant distributions and the adjustment into account, then the firm must apply a proportionate adjustment to amounts distributed to shareholders so that the distribution to policyholders will not be less than the required percentage.

(2) The adjustments referred to in (1) include but are not limited to a situation where such an adjustment has the effect of retrospectively reducing past policyholder distributions.

(1) the firm can show that attributing the tax liability to that with-profits fund is consistent with its established practice;

(2) that established practice is explained in the firm's PPFM; and

(3) that liability is not charged to asset shares.

Requirement relating to distribution of an excess surplus

(1) If a with-profits fund has an excess surplus, and to retain that surplus would be a breach of Principle 6 (Customers' interests), the firm should1 make a distribution from that with-profits fund.111

(2) Compliance with (1) may be relied on as tending to establish compliance with Principle 6 (Customers' interests).

(3) Contravention of (1) may be relied on as tending to establish a contravention of Principle 6 (Customers' interests).

Charges to a with-profits fund

Tax charge to a with-profits fund

New business

(1) the firm's governing body is satisfied, so far as it reasonably can be, and can demonstrate, having regard to the analysis in (2), that the terms on which each type of contract is to be effected are likely to have no adverse effect on the interests of the with-profits policyholders whose policies are written into that fund; and1

(2) the firm has:

(a) carried out or obtained appropriate analysis, based on relevant evidence and proportionate to the risks involved, as to the likely impact on with-profits policyholders, having regard to relevant factors including:

(i) the volumes of each type of contract that the firm expects to be effected; and

(ii) the periods over which the contracts are expected to remain in force; and

(b) provided the analysis referred to in (a) to its with-profits committee or, if applicable, its with-profits advisory arrangement and to its governing body for the purposes of (1).1

(1) 1Writing new insurance business into a with-profits fund is not, of itself, automatically adverse to the interests of with-profits policyholders. For example, new insurance business which defers the emergence or distribution of surplus to a limited extent for a number of policyholders, or which leads to a marginal change in the equity backing ratio, may, subject to satisfying the guidance in COBS 20.2.60 G and COBS 20.2.29 G, reasonably be considered not to have an adverse effect on the with-profits policyholders in a with-profits fund, if the firm's governing body is satisfied (and can demonstrate based on appropriate analysis) that each new line of insurance business is likely to be financially self-supporting over the periods during which the contracts are expected to remain in force and is likely to add sufficient value to the with-profits fund.

(2) Conversely, if the particular line of new insurance business is priced on loss-making terms or the terms are such that the new insurance business is not likely to generate sufficient value after covering all the costs associated with it (in either case when considered in aggregate over the periods over which the contracts are expected to remain in force), then in the FSA's view, the terms of that insurance business are likely to have an adverse impact on with-profits policyholders interests in the relevant fund.

(3) Firms will need to ensure that they comply with COBS 20.2.28 R at all times, but in practice firms will be expected to pay particular attention when they are designing and pricing or re-pricing products, when they are preparing their financial plans that take into account their expected costs and levels of new business, and, in particular, when reviewing their financial performance, if that reveals that costs or levels of new business have varied significantly from those expected previously.

(4) New business for the purposes of COBS 20.2.28 R will not, in general, include increments on existing policies or business written as a result of the exercise of options by an existing policyholder.

(1) where the firm has a high level of guarantees or options in its existing with-profits policies, which might place an excessive burden on new with-profits policies, or vice versa; and

(2) where the potential risks are likely to be so great that a single with-profits fund cannot provide adequately for the interests of new and existing policyholders, even after allowing for any beneficial effects of diversification. Such potential risks are likely to arise from significant differences in the terms and conditions of the new and existing with-profits policies, including the basis on which charges are levied and reviewed.

(1) When a firm prices the new insurance business that it proposes to effect in an existing with-profits fund, it should estimate the volume of new insurance business that it is likely to effect and then build in adequate margins that will allow it to recover any acquisition costs to be charged to the with-profits fund.1

(2) COBS 20.2.28 R requires firms to obtain appropriate analysis and evidence and this should include at least a profitability analysis on a marginal cost basis.1

Relationship of a with-profits fund with the firm and any connected persons

(1) make a loan to a connected person using assets in a with-profits fund; or

(2) give a guarantee to, or for the benefit of, a connected person, where the guarantee will be backed using assets in a with-profits fund;

(3) will be on commercial terms;

(4) will, in the reasonable opinion of the firm's senior management, be beneficial to the with-profits policyholders in the relevant with-profits fund; and

(5) will not, in the reasonable opinion of the firm's senior management, expose those policyholders to undue credit or group risk.

Contingent loans and other forms of support for the with-profits fund

(1) If a firm, or a connected person, provides support to a with-profits fund (for example, by a contingent loan), no reliance should be placed on that support when the firm assesses the with-profits fund's financial position unless there are clear and unambiguous criteria governing any repayment obligations to the support provider.

(2) The degree of reliance placed on that support should depend on the subordination of the support to the fair treatment of with-profits policyholders and clarification of what fair treatment means in various circumstances. For a realistic basis life firm this would normally be evidenced by the liability for such support being capable, under stress, of a progressively lower valuation in the future policy-related liabilities.

Other rules and guidance on the conduct of with-profits business1

(1) the extent of the guarantee in its with-profits policies;

(2) any representation that it has made to its with-profits policyholders;

(3) its established practice; and

(4) the amount of capital support available.

(1) use with-profits assets to finance the purchase of a strategic investment, directly or by or through a connected person; or1

(2) retain an investment referred to in (1);1

(1) 1In order for a firm to comply with COBS 20.2.36 R, a firm's governing body should consider:

(a) the size of the investment in relation to the with-profits fund;

(b) the expected rate of return on the investment;

(c) the risks associated with the investment, including, but not limited to, liquidity risk, the capital needs of the acquired business or investment and the difficulty of establishing fair value (if any);

(d) any costs that would result from divestment;

(e) whether the with-profits actuary would regard the investment as having no adverse effect on the interests of with-profits policyholders as a class;

(f) in the case of a proprietary firm, whether it would be more appropriate for the investment to be made using assets other than those in the with-profits fund; and

(g) any other relevant material factors.

(2) A firm should also consider whether making or retaining the investment should be disclosed to with-profits policyholders.

(3) Examples of strategic investments include, but are not limited to, a significant investment in another business or significant real estate assets used within the business of the firm.

Significant changes in with-profits funds1

(1) a significant bulk outwards reinsurance contract;

(2) inwards reinsurance of with-profits business from another insurance undertaking;

(3) a financial engineering transaction that would materially change the profile of any surplus expected to emerge on the with-profits fund's existing insurance business; and

(4) a significant restructuring of the with-profits fund, especially if it involves the creation of new sub-funds.

(1) the firm reasonably expects, or if earlier, there has been, a sustained and substantial fall in either the volume of new non-profit insurance contracts, or in the volume of new with-profits policies (effected other than by reinsurance), or in both, effected into the with-profits fund; or

(2) the firm cedes by way of reinsurance most or all of the new with-profits policies which it continues to effect.

(1) 1The aim of the discussions in COBS 20.2.41A R is to:

(a) allow the FSA to comment on the adequacy of the firm's planning; and

(b) seek agreement with the firm on any other appropriate actions to ensure with-profits policyholders are treated fairly.

(2) If the firm is no longer effecting a material volume of new with-profits policies (other than by reinsurance) into a with-profits fund; or if it is ceding by way of reinsurance most or all of the new with-profits policies which it continues to effect, then it may also be appropriate to consider whether, in the particular circumstances of the firm, it should be regarded as ceasing to effect new contracts of insurance for the purposes of COBS 20.2.54R (3).

(3) In the discussions the FSA will have with regard to COBS 20.2.28 R (New business), if the volumes of new business are expected to be profitable and, in relation to non-profit insurance business, it is demonstrated that a fair distribution to with-profits policyholders out of the fund can be achieved and the economic value of any expected future profits is likely to be available for distribution during the lifetime of the with-profits business for the purposes of COBS 20.2.60 G, then, in the FSA's view, it is likely to be reasonable for a firm to be satisfied that there will be no adverse effect for with-profits policyholders, and accordingly that such business may continue to be written.

Process for reattribution of inherited estates: Policyholder advocate: appointment and role

(1) 1first discuss with the FSA (as part of its determination under COBS 20.2.21 R):1

(a) its projections for capital required to support existing business, which must include an assessment of:1

(i) the firm's future risk appetite for the with-profits fund and other relevant business; and1

(ii) how much of the margin for prudence can be identified as excessive and removed from the projected capital requirements; and1

(b) its projections for capital required to support future new business, which must include an assessment of:1

(i) new business volumes;1

(ii) product terms; and1

(iii) pricing margins;1

(2) following the discussions referred to in (1), identify at the earliest appropriate point a policyholder advocate, who is free from any conflicts of interest that may be, or may appear to be, detrimental to the interests of policyholders, to negotiate with the firm on behalf of relevant with-profits policyholders and 1seek the approval of the FSA for the appointment of the policyholder advocate as soon as he is identified, or appoint a policyholder advocate nominated by the FSA if its approval is not granted; and

(3) involve the policyholder advocate designate at the earliest possible opportunity to enable him to participate effectively in the negotiations about the proposals for the reattribution.

(1) negotiating with the firm, on behalf of the relevant with-profits policyholders, the benefits to be offered to them in exchange for the rights or interests they will be asked to give up;

(2) commenting to with-profits policyholders, on:

(a) the methodology used for the allocation of benefits amongst the relevant (or groups of) with-profits policyholders and the form of those benefits;

(b) the criteria used for determining the eligibility of the various with-profits policyholders;

(c) the terms and conditions of the proposals (to the extent that they materially affect the benefits to be offered, or the bonuses that may be added to with-profits policies); and

(d) the views expressed by the independent expert or the reattribution expert (as the case may be), and the firm's with-profits actuary on the allocation of any benefits amongst the relevant with-profits policyholders; and

(3) telling with-profits policyholders, or each group of with-profits policyholders, with reasons, whether the firm's proposals are in their interests.

Process for reattribution of inherited estates: Policyholder advocate: terms of appointment

(1) notify the FSA of the terms on which it proposes to appoint a policyholder advocate (whether or not the candidate was nominated by the FSA); and

(2) ensure that the terms of appointment for the policyholder advocate:

(a) include a description of the role of the policyholder advocate as agreed with the FSA under COBS 20.2.44 G;1

(aA) stress the independent nature of the policyholder advocate's appointment and function, and are consistent with it;1

(b) define the relationship of the policyholder advocate to the firm and its policyholders;

(c) set out arrangements for communications between the policyholder advocate and policyholders;

(d) make provision for the resolution of any disputes between the firm and the policyholder advocate;

(e) specify when and how the policyholder advocate's appointment may be terminated;1

(f) allow the policyholder advocate to communicate freely and in confidence with the FSA;1

(g) require the policyholder advocate to communicate with policyholders:1

(i) as soon as is practicable after his appointment, having regard to (h)(i) and (iii); and1

(ii) thereafter no less frequently than every six months for the duration of the policyholder advocate's appointment; and1

(h) require the policyholder advocate:1

(i) to make reasonable endeavours to agree with the firm the contents of any proposed policyholder communications;1

(ii) to allow sufficient time for the process in (i) in order to meet any timescales in (g); and1

(iii) to provide copies of the final draft of the intended policyholder communications, whether or not agreement has been reached in accordance with (i) above, both to the firm and to the FSA at least seven days in advance of the date on which the policyholder advocate intends to make the communications.1

Process for reattribution of inherited estates: Reattribution expert

(1) appoint a reattribution expert to undertake an objective assessment of its reattribution proposals, who must be:

(a) nominated or approved by the FSA before he is appointed; and

(b) free from any conflicts of interest that may, or may appear to, undermine his independence or the quality of his report;

(2) ensure that the reattribution expert's terms of appointment allow him to communicate freely and in confidence with the FSA; and

(3) require the reattribution expert to prepare a report which must be available to the FSA, the policyholder advocate and the court (if it is relevant to any court proceedings).

(1) the 'scheme report' was a reference to the 'reattribution expert's report';

(2) the 'independent expert' was a reference to the 'reattribution expert'; and

(3) the 'scheme' was a reference to the proposal for a 'reattribution'.

Process for reattribution of inherited estates: Information to policyholders

(1) the reattribution process, including the role of the policyholder advocate, the independent expert or reattribution expert, as the case may be, and other individuals appointed to perform particular functions;

(2) the reattribution proposals and how they affect the relevant policyholders, including an explanation of any benefits they are likely to receive and the rights and interests that they are likely to be asked to give up;

(3) the policyholder advocate's views on the reattribution proposals and any benefits the relevant policyholders are likely to receive and the rights and interests that they are likely to be asked to give up; and

(4) the outcome of the negotiations between the firm and the policyholder advocate about the benefits that will be offered to relevant with-profits policyholders, in exchange for the rights and interests that they will be asked to give up.

Process for reattribution of inherited estates: Consent of policyholders

(1) individually accept or reject the final proposals for the reattribution; or

(2) (if the legal process to be followed allows the majority of policyholders to bind the minority) vote on whether the firm should go ahead with those proposals.

Process for reattribution of inherited estates: Costs

(1) Reattribution and insurance business transfer costs (excluding policyholder advocate costs) should be met from shareholder funds. A firm may present alternative arrangements if it can show good reasons for doing so.

(2) Shareholders should pay a reasonable proportion of the policyholder advocate's costs.

(3) If a reattribution proposal is not successful, the FSA would expect the costs of the policyholder advocate to be met by the person initiating the proposal. That will usually be the shareholders of the firm.

Ceasing to effect new contracts of insurance in a with-profits fund

(1) inform the FSA and its with-profits policyholders within 28 days; and

(2) submit a run-off plan to the FSA as soon as reasonably practicable and, in any event, within three months;

(1) when any decision by the governing body to cease to effect new contracts of insurance takes effect; or

(2) where no such decision is made, when the firm is no longer:

(a) actively seeking to effect new contracts of insurance in that fund; or

(b) effecting new contracts of insurance in that fund, except by increment; or1

(3) if the firm:1

(a) 

(i) is no longer effecting a material volume of with-profits policies (other than by reinsurance), into the with-profits fund; or1

(ii) is ceding by way of reinsurance most or all of the new with-profits policies which it continues to effect; and1

(b) cannot demonstrate that it will treat with-profits policyholders fairly if it does not cease to effect new contracts of insurance.1

(1) include an up-to-date plan to1 demonstrate how the firm will ensure a fair distribution of the closed with-profits fund, and its inherited estate (if any); and

(2) be approved by the firm's governing body.

(1) A firm should also include the information described in Appendix 2.15 (Run-off plans for closed with-profits funds) of the Supervision manual in its run-off plan.1

(2) A firm should periodically review and update its run-off plan and submit updated versions to the FSA when requested to do so.1

(1) why it has done so;

(2) what changes it has made, or proposes to make, to the fund's investment strategy (if any);

(3) how closure may affect with-profits policyholders (including any reasonably foreseeable effect on future bonus prospects);

(4) the options available to with-profits policyholders and an indication of the potential costs associated with the exercise of each of those options; and

(5) any other material factors that a policyholder may reasonably need to be aware of before deciding how to respond to this information.

(1) tell its with-profits policyholders that that is the case;

(2) explain what is missing and give a time estimate for its supply; and

(3) provide the missing information as soon as possible, and within the time estimate given.

(1) If non-profit insurance business is written in a with-profits fund, a firm should take reasonable steps to ensure that the economic value of any future profits expected to emerge on the non-profit insurance business is available for distribution during the lifetime of the with-profits business.

(1A) Where a with-profits fund contains assets which may not be readily realisable, the firm should take reasonable steps to ensure that the economic value of those assets is made available as part of a fair distribution to with-profits policyholders.1

(2) Where it is agreed by its with-profits policyholders, and subject to meeting the requirements for effecting new contracts of insurance in an existing with-profits fund (COBS 20.2.28 R), a mutual may make alternative arrangements for continuing to carry on non-profit insurance business, and a non-directive friendly society may make alternative arrangements for continuing to carry on non-insurance related business.