FCA thematic review TR19/3: Review of fair treatment of with-profits customers


22 July 2019

The FCA has completed its latest review into the fair treatment of with-profits customers and published its findings in April 2019 in Thematic Review TR19/3.   Sally Butters explains more. 

FCA Approach

The FCA supervises the conduct of life insurers managing with-profits funds.  Boards and senior managers together with the WPAA are accountable for the fair treatment of with-profits customers under the Senior Managers and Certification Regime (SM&CR).

Following an assessment of the areas of with-profits management which presented the highest potential risk of significant harm to with-profits customers, 4 key areas were identified:

  • Investment strategy and management
  • Capital management in key areas such as estate management
  • Fair allocation of risk and reward between stakeholders in capital management decisions
  • The governance of with-profits business for decisions on the areas listed above.

8 firms, representing approximately 80% of the total with-profits assets held (£296bn in 2015) were selected to participate in the review.

FCA Findings

Most firms were considered to be taking reasonable care to manage the risk of customer harm in their with-profits business and although a number of weaknesses were found, in most cases there was no evidence of actual customer harm having occurred.

In most cases appropriate governance was in place, but in the limited instances where a higher risk of customer harm was found, a key cause was failure of governance evidenced by ineffective oversight and challenge.

There were signs that firms were not complying with FCA rules in a small number of cases. Firms are reminded that the FCA’s rules must be complied with unless and until a waiver is granted, even where the firm considers that rules are not relevant due to the specific circumstances of their fund, where rules appear overly burdensome or do not appear to meet the purpose for which they were made.

A widespread need for firms to use their run-off plans as intended was identified. Run-off plans need to be up to date and used as living documents in the day to day management of with-profits funds.

2 specific areas of poor practice were noted:

  • Weaknesses in assessment and distribution of excess surplus
  • Insufficiently robust fund-level capital management approaches

Outcome 1 – Investment Strategy

The firm has implemented an appropriate investment strategy for the fund and regularly monitors its ongoing appropriateness and the terms on which it is implemented.

Investment performance was not assessed, but firm’s approaches to investment strategy and management and associated governance were found to be good.

Good examples:

Firms using different asset mixes for different funds, taking into account the duration, prevalence of guarantees and the capital position of the fund, reducing the risk of harm arising from inappropriate backing assets.

Where an in-house investment manager was used, reasonable governance oversight was carried out to manage potential conflicts of interest and ensure that customers were not disadvantaged.

Regular investment performance monitoring was taking place and action taken where persistent poor performance was observed.

An external review into the level and structure of investment management fees was initiated and changes made to achieve consistency across different with-profits funds, better alignment with market practice and more reflective of the work carried out by the fund manager.  The WPC provided oversight and challenge.

Outcome 2 – Capital Management – balancing the interest of different generations of policyholders

The firm has an overall capital management approach for the with-profits fund that fairly balances the interests of different generations of with-profits customers.

The focus of the review for this outcome was run-off plans (ROPs), fund level capital management, identification and distribution of the inherited estate and plans for winding up funds to ensure that the interests of different generations of with-profits customers are managed fairly.

Most firms were not using ROPs as the FCA intended – a tool to manage the ongoing run-off of a closed with-profits fund in a fair manner.  There was little use of ROPs as living documents in day to day management, some not having been updated in last 10 years.  ROPs contained little scenario analysis or focus on solvency rather than fair distribution of estate.

An absence of clear fund-level risk appetites was observed.  Although not a requirement of the COBs rules the FCA considers that not setting fund level risk appetites increases the risk of unfairness between exiting and continuing customers

A range of approaches to estate distribution were seen.  Although the FCA is not prescriptive about the approach there is an expectation that firms evidence why they believe payouts are fair.

Not all firms are carrying out formal assessments of excess surplus per COBs rules. FCA consider this carries a high risk of customer harm as customers exiting in the short term not receiving fair share of estate.  FCA rules require formal assessment even where distribution approach designed to distribute the entire estate or self-evident that there was no excess surplus.

Most closed funds in the FCA review had sunset clauses triggering the point at which the fund can or must be re-structured.  FCA expects firms to assess whether these clauses are still in customers best interests considering the risk of harm if the timing wrong; too late and excessive costs incurred due to lack of economies of scale; too early and policies made non-profit suffer a loss of investment returns.  Firms need to bear in mind the terms of the court scheme and may need to apply to the court to make changes.

Good examples

The WPA reviewed the ROP annually, showing how equitable estate distribution would be achieved by looking at the pattern of future payouts.  Scenarios for key risks and the impact on whether the estate distribution remained fair were included in the review.

Firm with a clear framework; 2 tests for solvency risk appetite (estate distribution test  and solvency test) with RAG rating and an intervention ladder.  Stress and scenario testing had been used to test the appropriateness of the buffer and the application of the risk appetite framework on estate distribution patterns in stressed conditions.

Clearly defined policy to identify and distribute excess surplus, related to capital management plan & risk appetite framework. Approach defined by evaluating the elements of excess surplus which are set by the firm rather than regulatory rules.

Poor examples

ROP not reviewed and updated regularly. Annual reports on solvency and fund management including estate distribution were provided, but focused on short-term decisions, with no long-term projections.  This resulted in too much focus on the current position of the fund rather than the impact of current decisions on longer-term run-off projections.

Capital requirement set at firm rather than fund level. 1 fund had higher than specified capital coverage although for the firm as a whole coverage was not excessive. Estate distribution for that fund not actively reviewed for a 4 year period despite increasing level of surplus, leading to a high risk that exiting customers may not have received a fair share of the estate.

Estate distribution was extended to non-profit policyholders in response to a developing tontine. Although the firm considered this to be fair, it was contrary to the PPFM, and the firm should also have considered whether this was a reattribution and notified the FCA before acting.

Outcome 3 – Risk and reward between stakeholders

The firm appropriately considers the risks borne by different stakeholders in allocating rewards from use of with-profits fund capital.

The FCA focus here was whether firms were adequately considering the interests of different stakeholders in decisions about the use of capital, and most firms were found to be taking reasonable care. Specific areas reviewed were controls over expenditure, continuation of past practice and management actions.

Good examples:

MI provided to the WPC and Board was sufficiently, but not excessively, detailed. It included the capital position relative to risk appetite, linked clearly to the decisions required to manage the fund and summarised the key drivers of changes in surplus over time.

The PPFM contained a section on management actions.  This covered why management actions may be needed, listing specific actions that may be taken and the extent of the actions depending on how stressed the conditions were.

Poor examples:

A firm undertook a significant regulatory change project involving significant costs being allocated to the with-profits funds’ estates.  There did not appear to be sufficient controls to monitor costs against budget and there was no clear articulation of the reasons that the approach to allocating costs across funds was considered to be fair.

On reviewing the level of charges to a transfer fund on expiry of the transfer scheme charges, the actual costs involved and the expected future costs (both lower than the scheme of transfer costs) were not considered and no change in charges was recommended by the WPA.  There was no challenge from the governance process and consequently the sub fund incurred a level of charges higher than those permitted by the transfer scheme or by COBS 20.2.23R.

Outcome 4 – Governance

The firm’s governance framework results in the fair treatment of with-profits customers.

Governance requirements specific to with-profits are set out in COBs 20.  Although on paper governance structures were found to be in line with COBS 20, there were some concerns about the practical application.

Good examples:

Appropriate consideration of the fairness of the allocation of risk and reward between customers and shareholders.

Whether in-house fund managers were providing value for money.

Initiating an independent review of the governance structure and implementing recommendations

Poor examples:

Little evidence of effective independent challenge

Resource stretch potentially leading to failure to comply with FCA rules or not ensuring that with-profits customers are treated fairly.

WPC meetings held too close to Board meetings so that queries raised by WPC could not be resolved before the Board makes a decision.

Next Steps

Firms should use the results of the review to improve the management of their with-profits funds and therefore improve outcomes for customers.  Consider whether current practice is aligned with the poor examples and what could be improved by reference to the good examples.

The FCA will hold round-table discussions with certain senior managers to hear their views on the findings and understand what actions are being taken as a result of the review findings

The findings of the review will be discussed with firms operating with-profits business as part of the normal supervisory processes.

If areas of poor practice are not addressed the FCA will consider further action.

No rule changes or new guidance is proposed as a result of the review, although the FCA is considering some focussed work about the use of With-Profits Advisory Arrangements.



Sally Butters

9 May 2109

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