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COB 6.10 Principles and Practices of Financial Management (PPFM)

Application and purpose Application

COB 6.10.1R
  1. (1)

    1The whole of this section, except COB 6.10.4A G and COB 6.10.21A R to COB 6.10.21J G, applies to a firm that:

    1. (a)

      carries on with-profits business;

    2. (b)

      is not an EEA insurer; and

    3. (c)

      is not a non-directive friendly society.

  2. (2)

    COB 6.10.4A G and COB 6.10.21A R to COB 6.10.21J G apply only to an EEA insurer that carries on with-profits business.

  3. (3)

    This section does not apply to with-profits business that consists of effecting or carrying out Holloway sickness policies.2

Purpose

COB 6.10.2G

Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and treat them fairly.

COB 6.10.3G

The rules and guidance in this section are intended to secure an appropriate degree of protection for policyholders, and potential policyholders, of firms carrying on with-profits business by requiring them to define and make available their Principles and Practices of Financial Management. These rules and guidance are also intended to enable policyholders and potential policyholders, of firms carrying on with-profits business better to understand the way in which firms carry on their with-profits business.

COB 6.10.4G

A firm's Principles and Practices of Financial Management also play an important role in promoting confidence among with-profits policyholders and in the governance arrangements for with-profits business set out in COB 6.11 (Reporting to with-profits policyholders on compliance with PPFM).

COB 6.10.4AG

The effect of COB 6.10.21A R, COB 6.10.21B R and COB 6.10.21C G is that an EEA insurer that carries on with-profits business must provide its UK with-profits policyholders with information equivalent in scope and content to the information that a UK insurer must provide in the form of Principles and Practices of Financial Management.2

Principles and Practices of Financial Management

COB 6.10.5R
  1. (1)

    A firm must establish and maintain the Principles and Practices of Financial Management according to which the business of its with-profits funds is conducted.

  2. (2)

    A firm must make a record of its Principles and Practices of Financial Management in (1), and retain that record for six years from the date on which it was superseded by a more up-to-date record.

COB 6.10.6G

Whether a separate PPFM is needed for each with-profits fund is a matter for the firm in the light of its circumstances, including previous management of those funds and any relevant representations made by the firm to with-profits policyholders.

COB 6.10.7G

In order to comply with COB 6.10.5 R a firm should:

  1. (1)

    establish and maintain a document approved by its governing body, setting out its PPFM; and

  2. (2)

    keep a record of each version of the PPFM as it changes over time.

Obligation to provide copies

COB 6.10.8R

A firm must provide a copy of its PPFM, or the PPFM applicable to specified with-profits funds:

  1. (1)

    free of charge at the request of any with-profits policyholder of the firm; and

  2. (2)

    at the request of any person who is not a with-profits policyholder of the firm if that person pays any reasonable charge the firm may make for providing that copy.

COB 6.10.9G

A firm should indicate in any annual statements sent to with-profits policyholders that copies of the firm's PPFM, or the PPFM applicable to specified with-profits funds, are available on request, under COB 6.10.8 R. The PPFM might also be published on a firm's website.

Principles of Financial Management

COB 6.10.10G

The with-profits principles within the PPFM must:

  1. (1)

    be enduring statements of the overarching standards the firm adopts in managing with-profits funds; and

  2. (2)

    describe the business model used by the firm in meeting its duties to with-profits policyholders and in responding to longer-term changes in the business and economic environment.

COB 6.10.11G

The with-profits principles are not expected to change often. However, they should be informative enough to enable the directors, any actuary appointed under SUP 4 (Actuaries) and any With-profits Committee, amongst others, to judge whether existing or potential with-profits practices are appropriate for the firm.

COB 6.10.12R

A firm must send its with-profits policyholders written notice, setting out any proposed changes to the with-profits principles of the firm, three months in advance of the effective date of the proposed changes.

COB 6.10.13R

If a firm maintains more than one PPFM, the notice in COB 6.10.12 R need only be sent to those policyholders affected by the PPFM being changed.

COB 6.10.14G

A firm may give the notice required under COB 6.10.12 R by including the required information in any annual statements sent to with-profits policyholders if this is at least three months in advance of the effective date of the proposed changes.

COB 6.10.15G

Changes to the with-profits principles of a firm are likely to trigger one or more of the firm's obligations to notify the FSA under SUP 15.3 (General notification requirements).

Practices of Financial Management

COB 6.10.16R

The with-profits practices within the PPFM must:

  1. (1)

    describe the firm's approach to managing with-profits funds and to responding to changes in the business and economic environment in the shorter-term; and

  2. (2)

    contain sufficient detail to enable a knowledgeable observer to understand the material risks and rewards from effecting or maintaining a with-profits policy with the firm.

COB 6.10.17G

Subject to the with-profits principles, a firm's with-profits practices are expected to change as the firm's circumstances and the business environment change, with some alteration, for example, every few years.

COB 6.10.18R

A firm must send its with-profits policyholders written notice, setting out any changes to the with-profits practices of the firm.

COB 6.10.19R

If a firm maintains more than one PPFM, the notice in COB 6.10.18 R need only be sent to those policyholders affected by the PPFM being changed.

COB 6.10.20G

A firm may give the notice required under COB 6.10.18 R by including the required information in any annual statements sent to with-profits policyholders. The notice can be in arrears but should be within a reasonable time period from the effective date of the change.

COB 6.10.21G

Changes to the with-profits practices of a firm may trigger one or more of the firm's obligations to notify the FSA under SUP 15.3 (General notification requirements).

COB 6.10.21AR

2An EEA insurer must, on the request of any with-profits policyholder who is habitually resident in the United Kingdom, provide the information necessary to enable that policyholder properly to understand the essential elements of the insurer's commitment under the policy.

COB 6.10.21BR

2The information provided under COB 6.10.21A R must not be narrower in scope or less detailed in content than the equivalent PPFM under COB 6.10.22 R to COB 6.10.62.

COB 6.10.21CG

2An EEA insurer should indicate in any annual statements sent to with-profits policyholders that the information provided under COB 6.10.21A R is available on request. The PPFM might also be published on an EEA insurer's website.

COB 6.10.21DR

2An EEA insurer must send its with-profits policyholders who are habitually resident in the United Kingdom, written notice, setting out any proposed changes to that part of the information provided under COB 6.10.21A R that is equivalent in substance to the with-profits principles of a firm to which COB 6.10.1 R(1) applies.

COB 6.10.21ER

2An EEA insurer must send the notice provided under COB 6.10.21D R three months in advance of the effective date of the proposed changes.

COB 6.10.21FR

2An EEA insurer may send the notice provided under COB 6.10.21D R only to those policyholders affected by the information being changed.

COB 6.10.21GG

2An EEA insurer may give the notice provided under COB 6.10.21D R by including the required information in any annual statements sent to with-profits policyholders if this is at least three months in advance of the effective date of the proposed changes.

COB 6.10.21HR

2An EEA insurer must send its with-profits policyholders who are habitually resident in the United Kingdom, written notice, setting out any changes to that part of the information provided under COB 6.10.21A R that is equivalent in substance to the with-profits practices of a firm to which COB 6.10.1 R(1) applies.

COB 6.10.21IR

2An EEA insurer may send the notice provided under COB 6.10.21H R only to those policyholders affected by the information being changed.

COB 6.10.21JG

2An EEA insurer may give the notice provided under COB 6.10.21H R by including the required information in any annual statements sent to with-profits policyholders. The notice can be arrears but should be within a reasonable time period from the effective date of the change.2

Scope and content of the Principles and Practices of Financial Management

COB 6.10.22R
  1. (1)

    The PPFM of a firm must cover any issues that has, or it is reasonably foreseeable may have, a significant impact on the firm's management of with-profits funds.

  2. (2)

    The issues in (1) include: the amount payable under a with-profits policy, the investment strategy, business risk, charges and expenses, management of the inherited estate, volumes of new business and arrangements on stopping new business and arrangements on stopping taking new business, and equity between the with-profits fund and any shareholders.

COB 6.10.23G

In addition to the issues in COB 6.10.22 R(2), a firm's PPFM should also cover any other areas that are important to the management of its with-profits funds and that may affect the amounts payable under with-profits policies.

COB 6.10.24G

A firm's PPFM should reflect any requirements or constraints relevant to the management of with-profits funds that apply to the firm as a result of previous dealings: for example, previous business transfer schemes. The PPFM should also set out the extent to which the firm's freedom to alter its PPFM is constrained, including by such previous dealings.

COB 6.10.24AG

3A firm's PPFM should describe the nature and extent of any shareholder commitment to support the with-profits fund. It should also describe when and how that commitment will take effect.

COB 6.10.25G

The rest of this section includes rules on each of the issues that a firm's PPFM must cover, followed in each case by guidance on how various information relevant to that issue might be split between with-profits principles and with-profit practices.

The amount payable under a with-profits policy

COB 6.10.26R

The PPFM of a firm must cover the methods that the firm uses to guide its determination of the amount that it is appropriate to pay individual with-profits policyholders, including:

  1. (1)

    the aims of the methods used, and the approximations used;

  2. (2)

    how the current methods, including any relevant historical assumptions used and any systems maintained to deliver results of particular methods, are documented within the firm; and

  3. (3)

    the procedures for changing either the current method or any assumptions or parameters relevant to a particular method.

COB 6.10.27G

A firm may use a number of methods to determine the amount payable to a with-profits policyholder and may use more than one method to determine the amount payable to a particular with-profits policyholder.

COB 6.10.28G

The firm's with-profits principles should describe:

  1. (1)

    the aims of the methods the firm uses to determine the amount payable to with-profits policyholders;

  2. (2)

    the degree of approximation that the firm is prepared to allow in the application of those methods and in the application of its with-profits principles;

  3. (3)

    how the firm controls changes to those methods; and

  4. (4)

    the circumstances under which the firm might change any historical assumptions or parameters relevant to those methods: for example, previously applied investment returns, charges, or allocations of miscellaneous surplus, that have been derived from the historical experience and actions of the firm.

COB 6.10.29G

The firm's with-profits practices should describe, for each major class of with-profits policy:

  1. (1)

    the methods that the firm currently uses to determine the amount payable to with-profits policyholders;

  2. (2)

    the methods that the firm currently uses to determine the main assumptions or parameters that determine the output of those methods;

  3. (3)

    the degree of approximation that the firm allows when it applies assumptions or parameters across generations of with-profits policyholders or across different types or classes of with-profits policies;

  4. (4)

    the formality with which the firm documents the methods, parameters or assumptions that it uses to determine the amount payable to with-profits policyholders; and

  5. (5)

    the firm's internal procedures for changing either the current methods or the current parameters or assumptions relevant to a particular method; and3

    3
  6. (6)

    the firm's target range, or target ranges, that have been set and specified pursuant to COB 6.12.17 R; and3

  7. (7)

    the factors that the firm is likely to regard as relevant under COB 6.12.59 R.

COB 6.10.30G

The firm's with-profits practices should describe how the firm brings investment return, expenses or charges and tax into account and how the firm determines the impact of those items on the amount payable under a with-profits policy. In particular, the firm's with-profits practices should describe:

  1. (1)

    any distinctions that the firm makes in recognising the investment return from a subset of the total assets of a with-profits fund;

  2. (2)

    whether the firm apportions expenses fully between all the policies in a with-profits fund or apportions expenses in some other way, for example, by meeting some expenses from the firm'sinherited estate;

  3. (3)

    the relationship between the actual liability to tax of a with-profits fund and the tax that the firm imputes to determine the amount payable under a with-profits policy;

  4. (4)

    the impact on the amount payable under a with-profits policy of any liability to tax of a with-profits fund as a result of the firm making a transfer to shareholders; and

  5. (5)

    how the firm brings any other items into account, including, for example, charges made for the costs of guarantees, charges for the use of capital and charges for other risks.

COB 6.10.31R

The PPFM of a firm must cover the firm's approach to setting annual bonus rates applicable to with-profits policies.

COB 6.10.32G

The firm's with-profits principles should:

  1. (1)

    describe the firm's general aims in setting annual bonus rates and the constraints to which the firm may be subject in changing economic circumstances; and

  2. (2)

    indicate how the firm would determine the range of with-profits policies or generations of with-profits policies over which the firm believes a single bonus rate would be appropriate and the circumstances under which the firm believes a new bonus series would be necessary.

COB 6.10.33G

The firm's with-profits practices should:

  1. (1)

    describe the firm's current approach to setting annual bonus rates, including the weight given to recent economic experience;

  2. (2)

    indicate the frequency at which the firm re-sets or expects to re-set annual bonus rates;

  3. (3)

    indicate the maximum amount (if any) by which annual bonuses would alter if the firm were to re-set annual bonus rates; and

  4. (4)

    describe the firm's approach to setting any interim bonus rates before the next declaration of annual bonus rates.

COB 6.10.34R

The PPFM of a firm must cover the firm's approach to setting final bonus rates applicable to with-profits policies.

COB 6.10.35G

The firm's with-profits principles should describe the firm's approach to setting final bonus rates, in the context of the firm's general aims in determining the total amount payable under with-profits policies, and by reference to the constraints to which the firm may be subject in changing economic circumstances.

COB 6.10.36G

The firm's with-profits practices should:

  1. (1)

    describe the firm's current approach to setting final bonus rates, including the weight given to recent economic experience. The description should include any distinctions that the firm makes between with-profits policies that remain in force until contractual dates, or dates on which no market value reduction applies (for example, maturity or retirement dates) and policies that are surrendered or transferred at other dates;

  2. (2)

    describe the relationship or interaction between final bonus rates and any market value reductions, if both can apply at the same time;

  3. (3)

    describe how final bonuses influence the value of with-profits policies that have formulaic surrender or transfer bases (for example, older conventional policies rather than unitised policies); and

  4. (4)

    indicate the frequency at which the firm sets or expects to set final bonus rates and the circumstances under which changes in the economic environment would cause the firm to change the time between re-setting.

COB 6.10.37G

The PPFM should describe the firm's approach to smoothing the value of with-profits policies, including those matters required under COB 6.12.47 R.3

COB 6.10.38G

The firmwith-profits principles should:

  1. (1)

    indicate whether and in what respect the firm takes a significantly different approach to smoothing depending on the type of claim arising from with-profits policies;

  2. (2)

    indicate whether the firm intends smoothing to be neutral over time;

  3. (3)

    indicate whether there is any total scale or cost of smoothing to the firm over the shorter-term that the firm believes should not be exceeded. The FSA takes the cost of smoothing to mean the extent to which the amount actually payable under a with-profits policy diverges from the theoretical determinant of policy value under COB 6.10.26 R, except where due to applicable guarantees; and

  4. (4)

    indicate whether the firm's applies market value reductions, or changes the surrender bases for with-profits policy that are not unitised, only to reflect changes in underlying asset values.

COB 6.10.39G

The firm's with-profits practices should:

  1. (1)

    indicate how rapidly the firm might need to adjust the value of with-profits policies, by specifying any period over which the firm expects smoothing to be neutral;

  2. (2)

    indicate whether there is any overall limit to the accumulated cost of, or excess from, smoothing that the firm is prepared to tolerate;

  3. (3)

    indicate whether the firm applies a single smoothing strategy to all generations and types of with-profits policy, or applies different smoothing strategies to subsets of the with-profits fund, in particular whether (and in what respect) the firm applies a different smoothing strategy to new entrants to a with-profits fund when the accumulated cost or excess from smoothing is large;

  4. (4)

    describe the firm's current approach to smoothing: for example, the acceptable degree of change in the value of similar with-profits policies from one year to the next, or the formula the firm uses to recognise recent investment performance as a determinant of the value of a with-profits policy;

  5. (5)

    describe how the firm applies smoothing to classes of with-profits policies that participate in final bonuses indirectly: for example, older policies with formulaic surrender or transfer bases;

  6. (6)

    describe how accurately the firm applies market value reductions or surrender and transfer bases to give effect to smoothing; and

  7. (7)

    describe how the firm accounts for partial payments under with-profits policies to which no penalty (for example, by market value reductions) is applied, in determining the eventual total value of a with-profits policy.

Investment strategy

COB 6.10.40R

The PPFM of a firm must cover the significant aspects of the firm's investment strategy for its with-profits business or, if different, any with-profits fund, including:

  1. (1)

    the degree of matching to be maintained between assets relevant to with-profits business and liabilities to with-profits policyholders and other creditors;

  2. (2)

    the firm's approach to assets of different credit or liquidity quality and different volatility of market values;

  3. (3)

    the presence among the assets relevant to with-profits business of any assets that would not normally be traded because of their importance to the firm, and the justification for holding such assets; and

  4. (4)

    the firm's controls on using new asset or liability instruments and the nature of any approval required before new instruments are used.

COB 6.10.41G

The firm's with-profits principles should:

  1. (1)

    set out the firm's investment strategy in terms that allow alternative with-profits practices to be judged and where necessary rejected. The firm's with-profits principles should therefore specify the specific factors that drive the firm's investment strategy, in more detail than, for example, simply achieving the best return within the framework of the likely volatility of asset values;

  2. (2)

    if the firm relies on assets outside a with-profits fund to maintain the firm's investment strategy, state on which assets and to what degree the firm relies;

  3. (3)

    set out how the firm views the use, as part of its investment strategy, of derivatives and other instruments that may alter the economic out-turn from assets;

  4. (4)

    set out any constraints on the firm's investment strategy either with respect to parts of a with-profits fund (for example, classes of with-profits policy or bonus series) or between different generations of with-profits policyholders; and

  5. (5)

    set out any overarching constraints on the firm's exposure to any one counterparty including derivative exposures.

COB 6.10.42G

The firm's with-profits practices should:

  1. (1)

    describe what procedures the firm follows to transfer assets to the with-profits fund under COB 6.10.41 G(2) and at what point such transfers would be recognised as irretrievable by the provider of outside assets;

  2. (2)

    set out the period between formal reviews of the firm's investment strategy;

  3. (3)

    describe the degree of matching the firm maintains between the assets of a with-profits fund and liabilities to with-profits policyholders and other creditors, and the basis of the liabilities assessed for such purposes;

  4. (4)

    explain the firm's approach to investment in different asset classes, and assets of different credit or liquidity quality. This may include, for example, the firm's guidelines as to the overall limit on the amount of a with-profits fund that may be invested in particular asset classes and the overall crediting rating of parts of the portfolio, the minimum credit quality of new and existing investments as well as the overall liquidity constraints on the with-profits fund; and

  5. (5)

    explain the approval process that the firm operates before investing in new or novel investment instruments.

COB 6.10.43G

A with-profits fund may include assets that would not normally be traded because of their importance to the firm. These might be physical assets: for example, the firm's head office building, but may include contingent support or guarantee arrangements to or from other entities.

COB 6.10.44G

In relation to assets that would not normally be traded because of their importance to the firm, the with-profits principles of the firm should:

  1. (1)

    describe why such assets are of use to a with-profits fund;

  2. (2)

    describe what reviews the firm carries out to ensure those assets still remain of use;

  3. (3)

    set out any limits that the firm imposes on the scale of investment in those assets;

  4. (4)

    indicate whether the out-turn from investment in those assets will impact on the amounts payable under with-profits policies; and

  5. (5)

    indicate what credit or liquidity requirements the firm applies to investments in those assets.

COB 6.10.45G

In relation to assets that would normally be trade, the with-profits practices of the firm should describe those assets, their current application in determining claim values and any constraints imposed on the firm's investment freedom as a result of its investment in those assets.

Business risk

COB 6.10.46R

The PPFM of a firm must cover the exposure of the firm'swith-profits business to business risk, including the firm's:

  1. (1)

    procedures for deciding if the with-profits business may undertake a particular business risk;

  2. (2)

    arrangements for reviewing and setting a limit on the scale of such risks; and

  3. (3)

    procedures for reflecting the profits or losses of such business risks in the amounts payable under with-profits policies.

COB 6.10.47G

Business risk for a with-profits fund can include a number of exposures, for example:

  1. (1)

    exposure to maintaining and acquiring with-profits policies;

  2. (2)

    exposure to maintaining and acquiring non-profit policies;

  3. (3)

    exposure to risks from other investments: for example, in investment management companies, service companies or overseas subsidiary insurance companies.

COB 6.10.48G

The PPFM of a firm should make clear how the firm considers such exposures before they are taken up or entered into, and how the firm intends to deal with rewards or risks going forward. In particular, the PPFM should make clear what alternatives the firm sets as a benchmark when reviewing existing business risk and new business risks to determine whether the rewards are reasonable given the risks undertaken.

COB 6.10.49G

Where the firm explicitly excludes business risk from a class of with-profits policies there may often be residual risks from the class that are natural to with-profits policies such as guarantee and smoothing costs. The PPFM should make clear where such costs are borne.

COB 6.10.50G

The firm's with-profits principles should set out the general limits that the firm applies to the taking on of business risk and the control that the firm exercises over existing business risk. In particular, the with-profits principles should define where compensation costs from a business risk would be borne.

COB 6.10.51G

The firm's with-profits practices should:

  1. (1)

    describe the current limits that the firm applies to the taking on of business risk;

  2. (2)

    describe the firm's approach to the application of the rewards and losses from business risks as a determinant of the amount payable under a with-profits policy;

  3. (3)

    describe the degree to which the firm smoothes any profits or losses from business risks before applying them to determine the amount payable under a with-profits policy;

  4. (4)

    indicate whether profits or losses from business risks must exceed a minimum value or scale before the firm will treat them as a determinant of the amount payable under a with-profits policy; and

  5. (5)

    indicate whether and to what extent particular generations of with-profits policyholders or classes of with-profits policy bear or might bear particular business risks, including, for example, crystallised or contingent guarantees to other classes of policyholder or whether the out-turn from all business risk is pooled across all with-profits policies.

Charges and expenses

COB 6.10.52R

The PPFM must cover the way in which the firm applies charges and apportions expenses to its with-profits business, including, if material, any interaction with connected firms.

COB 6.10.53G

The firm's with-profits principles should:

  1. (1)

    describe the overall aim of the firm's approach to applying charges and apportioning expenses to with-profits policies, covering all types of charges and expenses including investment costs, commissions and charges borne from investment through collective investment schemes; and

  2. (2)

    set out the factors that would drive any change to the basis on which the firm applies charges to or apportions its actual expenses amongst with-profits policies , or exercises any discretion to apply charges to particular with-profits policies.

COB 6.10.54G

The firm'swith-profits practices should:

  1. (1)

    give a general description of the charges that the firm currently applies and the expenses that it currently apportions to major classes of with-profits policies;

  2. (2)

    describe the relationship between the firm's actual charges and expenses, as applied to determine the amounts payable under with-profits policies, and the charges and expenses borne by the with-profits fund;

  3. (3)

    state the circumstances under which the firm will charge expenses to the with-profits fund at an amount other than cost, and the reasons why the firm will do so; and

  4. (4)

    state the interval at which the firm will review any arrangements under which it obtains out-sourced services, included those provided by connected parties, and give a broad indication of the terms on which the firm would be able to terminate the agreements to provide those services.

COB 6.10.55G

The PPFM of a firm should make clear the criteria that the firm will apply when it has to make judgements about how to apply charges and apportion expenses between with-profits funds or between a with-profits fund and shareholder owned funds, firms or service companies.

Management of the inherited estate

COB 6.10.56R

The PPFM of a firm must cover the firm's management of any inherited estate and the uses to which the firm may put that inherited estate.

COB 6.10.57G

The firm'swith-profits principles should:

  1. (1)

    describe how the firm will manage its inherited estate;

  2. (2)

    describe the purposes for which the firm will apply the inherited estate;

  3. (3)

    indicate the size or scale of inherited estate for which the firm is aiming, for example, by reference to the volume of the firm's existing business or the risks borne by the firm's existing business;

  4. (4)

    explain the implications of the firm's preferred size or scale of inherited estate for the value of the firm's with-profits policies;

  5. (5)

    describe any existing division of the firm's inherited estate between with-profits funds within the firm; and

  6. (6)

    describe any constraints on the firm's freedom to deal with the inherited estate as a result of previous dealings: for example, a transfer of business scheme or attribution or re-attribution of a previous inherited estate.

COB 6.10.58G

The firm's with-profits practices should:

  1. (1)

    describe how the firm uses the inherited estate by, for example, reference to the costs the inherited estate is meeting;

  2. (2)

    state whether the firm's investment strategy for the firm's inherited estate is different to the firm's investment strategy for the rest of the with-profits fund; and

  3. (3)

    describe any current guidelines that the firm has in place as to the size or scale of the inherited estate or as to how the firm would mange the inherited estate and over what time period, if it became too large or too small.

Volumes of new business and arrangements on stopping taking new business

COB 6.10.59R

The PPFM of a firm whose with-profit fund is accepting new business must cover the firm's practice for review of the limits on the quantity and type of new with-profits business and the actions that the firm would take if it ceased to take on new with-profits business of any significant amount.

COB 6.10.60G

The firm'swith-profits principles should:

  1. (1)

    set out the firm's approach to setting the volume of new business, both new with-profits business and non-profit business written in the with-profits fund; and

  2. (2)

    set out the firm's anticipated reaction to closure to significant amounts of new business and, in particular, what action it would take in that event as regards the distribution of any inherited estate.

20040430G

The firm's with-profits practices should:

  1. (1)

    describe the approach the firm takes to setting any maximum volume of new business each year and any particular limits on classes of business, including non-profit business within the with-profits fund; and

  2. (2)

    describe what the firm considers should be the minimum proportion and scale of new business of a with-profits type to justify the with-profits fund staying open to new business.

Equity between the with-profits fund and any shareholders

COB 6.10.62R

The PPFM of a firm must cover the firm's approach to achieving a balance between the interests of with-profits policyholders and the interests of any shareholders of the firm.

COB 6.10.63G

The firm's with-profits principles should:

  1. (1)

    describe the firm's arrangements for profit sharing between shareholders and with-profits policyholders and the scope for changes in the share of profits allotted to each; and

  2. (2)

    indicate the approach that the firm will take before any changes to the profit sharing arrangements are implemented.

COB 6.10.64G

The firm's with-profits practices should:

  1. (1)

    indicate the current basis on which the firm divides profit between with-profits policyholders and shareholders, including the method of calculating the profit to be divided;

  2. (2)

    indicate whether the division of profit between with-profits policyholders and shareholders would change if there was a change in the underlying basis on which the shareholder share is computed (normally the valuation basis of the mathematical reserves);

  3. (3)

    indicate other factors that would have a significant impact on the balance between the shareholder share and the with-profits fund, for example:

    1. (a)

      tax or other imposts; or

    2. (b)

      distributions in anticipation of a surplus; or

    3. (c)

      the firm's approach to with-profits policies with both an entitlement to final bonus and an exposure to a market value reduction; or

    4. (d)

      the impact of guaranteed bonuses; and

  4. (4)

    state whether the pricing of any policies that the firm is writing, and particular policies open to new business, appear to be significantly and systematically reducing the firm'sinherited estate if the shareholder transfer is taken into account.