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With-profits governance

The governance of a with-profit fund is not simple but can it be straightforward?

Paper 5 in the series of consultative papers published by the FSA as part of their review of with-profit funds deals with governance and the role of appointed actuary. In the paper the FSA proposes five options for the future governance of with-profit funds and all are worthy of review.

Option 1 would require the directors to define the principles and practices of financial management. This basically means that the principles and practices outlined in Issues Paper 4 would be implemented – which would be good news.

The concept of a principles of financial management document is not a new one. In recent years they have regularly formed part of the court documentation in support of the transfer of a business (for example, the acquisition of one company by another). The principles would presumably be long-term in nature (to reflect the business) and consistent with the company&#39s definition of policyholders reasonable expectations.

Publication would force all providers in this market to be open and transparent in their own aims and basis of operation. Who could possibly oppose such a move?

The possibility of policyholder representation on the boards of with-profit providers is the subject of Option 2. Such a move would have the apparent advantage of ensuring that policyholders were represented directly in Board discussions affecting with profits policies. But would they?

How would you identify the appropriate individuals and how would you select one? Would you need different representatives for different types of with-profit policies (as their interests could be conflicting)? Direct representation could have some benefits but the worst outcome I can envisage would be giving the appearance of direct representation without it being effective.

The third option proposed is that of a with-profit fund committee (either constituted separately from the board or as a sub-committee of the board). The role of the committee would be to monitor the areas where the directors have discretion. This sort of committee already exists in certain circumstances where demutualisation has occurred.

The FSA paper postulates that such a committee would add weight to the appointed actuary&#39s proposals on bonus rates etc but is this realistic? I am inclined to think that it would add little to the proposals of an appointed actuary, particularly once they had been independently reviewed by a peer.

I also wonder whether or not the Board would be happy to devolve such an important activity to a sub-committee. Would the full Board not wish to be involved?

Option 4 proposes that directors should have a statutory duty to have due regard to the interests of policyholders. The FSA appears to have included this option as a result of some responses to the initial discussion paper from May 2001.

The existing requirements of directors already place them in the position of having to take account of the interests of policyholders and extending these requirements might be worthwhile – but only if there was a scheme of enforcement and remedies to deal with breaches. The wording of Paper 5 suggests that the FSA is doubtful of the benefit of such a move.

The final proposal in the governance section of the paper is regarding the beneficial ownership of assets by policyholders. The issue being considered here is that, unlike a unit trust or Oeic, the assets of a with-profit fund are not owned by the investors. The pooled assets of the with-profit fund belong to the insurer not to the investors (although the investor has a contractual right to the policy benefits).

Amending the structure of life funds to give policyholders direct ownership would not be a trivial job. The paper highlights that there would be major technical issues and judicial process required for each company involved. This could only be justified if it was thought to be a major step forward. I can&#39t see how this could be the case.

It will be clear that each of the options in the paper need to be considered separately. They also need to be viewed on a cost/benefits basis. In presenting the options the FSA has taken due account of representation regarding the May 2001 document but has also been clear where it feels that action is not required.

Submissions were due to reach the FSA by April 12 – we look forward to seeing the outcome of the process.

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