Thank you for your letter of January 23 about Standard Life.
The question of the corporate structure of Standard Life and of any other mutual is entirely a matter for its board and its members. The FSA has not recommended that the company should demutualise and has no objective that this should happen.
Our concern is to satisfy ourselves that all regulated firms, including this company, meet their regulatory obligations and that they will continue to do so.
If the Standard Life board decides to propose an alternative structure to its members, our concern will be to ensure that it has considered its policyholders' interests properly, that it will treat them fairly during any demutualisation process and that, if there proves to be any potential conflicts of interest within the executive or board, these are properly handled.
You ask about the discussions between us and Standard Life. For reasons which I hope you will understand, the subject matter of such discussions must remain confidential between us and the company. What I can say is that we maintain a close and continuous relationship with firms of this size and regularly discuss with them major strategic issues, including at the most senior level.
You express concern about the benefits of mutuality no longer being included in illustrations of future returns. This is a matter for Standard Life. The test we apply is whether the company is treating its policyholders fairly.
If in our view it is not, we have powers to intervene. We have made clear that we will be reviewing the impact on policyholders of the measures proposed by the company in the light of our requirements on treating customers fairly.
The background to the current position is that, in the course of developing the realistic reporting of its financial position, the firm identified a significant divergence in the calculation of its liabilities.
This accelerated the need for it to consider what benefits previously illustrated to policyholders should be treated as a liability under the FSA's forthcoming realistic solvency tests.
As you may be aware, we are currently consulting on these rules and expect to finalise them in time for them to come into effect at the end of 2004.) In line with this new app-roach, Standard Life will assess at the time of a claim or policy surrender whether certain discretionary benefits, including any benefits of mutuality, should be included in the final payout. Any such benefits would be accounted for and settled on a cash basis – policyholders should not expect necessarily to receive them.
As you point out, Standard Life is proposing in future to charge policyholders for the guarantees provided. It may be that a number of other insurance companies will look to adopt the same approach.
It is essential, in our view, for capital to be held against such guarantees. Companies in other sectors of the financial services industry price the cost of providing guarantees or options into the product. In the absence of such provision, the company might have insufficient funds to meet the guarantees should they crystallise or it would have to cross-subsidise such costs between generations or classes of customer.
However, as noted earlier, it is important that any charges are consistent with trea-ting customers fairly, for example, having regard to the marketing literature used to promote the policies.
On mutuality more generally, we have no view one way or the other about the merits of a mutual structure compared with a proprietary structure involving shareholders.
As I said earlier, decisions on this are entirely for the boards and members of mutual societies. Mutual and proprietary structures exist in the financial services market. This diversifies the range of choice available to consumers. The FSA has a statutory obligation to have regard to competition and innovation in all its work and I believe that such diversity is consistent with these principles.
At the same time, it is clear that many life insurers (especially those insurers heavily involved in selling smoothed with-profits policies) need considerable capital to back their business and that a mutual has a different and sometimes more limited range of choice as to how to respond to any capital shortfall.
I hope that this is helpful. In the light of the public interest in the issues you raise, we are putting our reply to you into the public domain.