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COB 6.13 Process for reattribution of inherited estates

1

Application and purpose

Application

COB 6.13.1R
  1. (1)

    This section applies to a firm that carries on with-profits business and is proposing to make a reattribution of its inherited estate.

  2. (2)

    Notwithstanding (1), this section does not apply to a firm if, and to the extent that, it would require the firm to breach, or would prevent the firm from complying with, an order made by a court of competent jurisdiction.

  3. (3)

    If a firm proposes to seek an order, from a court of competent jurisdiction, that would allow or require it to act in a way that is contrary to the rules in this section (through, or because of, the exception in (2)), the firm must:

    1. (a)

      tell the FSA that that is what it proposes to do; and

    2. (b)

      seek the order at the earliest opportunity.

  4. (4)

    If a firm wishes to take a step that would be contrary to the rules in this section, in anticipation of such an order, it must secure a waiver before it does so.

Purpose

COB 6.13.2G

The rules and guidance in this section are intended to:

  1. (1)

    help firms to understand the arrangements, or the types of arrangement, that the FSA regards as appropriate when a firm makes a reattribution of its inherited estate; and

  2. (2)

    ensure that policyholders are treated fairly during the reattribution process.

COB 6.13.3G

The FSA accepts that the interests of policyholders may be protected in a number of ways, depending on the circumstances of the firm and the type of reattribution that it proposes to make. In many cases, this will involve the sanctioning of an insurance business transfer scheme under Part VII of the Act, but that will not always be the case. The rules and guidance in this section are therefore intended to be sufficiently flexible to be capable of delivering the objective of ensuring that policyholders are treated fairly, regardless of the particular type of reattribution and whichever legal process is used. COB 6.13.1 R (2) also recognises that in some cases, for example, in connection with an insurance business transfer, the courts have the power to make procedural and other orders that may affect the application of the rules and guidance in this section.

COB 6.13.4G

A firm may propose alternative arrangements to those set out in this section by applying for a waiver under section 148(4) of the Act (Modification or waiver of rules).

COB 6.13.5G

Whether or not a waiver is required, a firm should consult the FSA about its intentions, before it begins a reattribution process, if it wishes the FSA to consider whether the firm's detailed proposals are consistent with the Principles for Businesses and, in particular, Principle 6 (Customers' interests). The FSA will endeavour to respond to a firm's proposals, including by giving guidance (if appropriate), within a reasonable time.

COB 6.13.6G

Although the FSA's approval is not required before a firm can make a reattribution , the FSA has the power, under section 45 of the Act (Variation etc. on the Authority's own initiative), to impose a requirement on a firm'spermission if it appears to the FSA that it would be desirable to do so in order to protect the interests of consumers. If the FSA considers that some, or all, of a firm'sreattribution is inconsistent with the Principles for Businesses, the FSA may use that power to require a firm to modify, or to refrain from carrying out, some or all of its reattribution.

COB 6.13.7G

The way in which the FSA may use its power to vary a permission on its own initiative is explained in SUP 7 (Individual requirements). One ground for using the power is that the FSA considers it desirable to do so in order to protect the interests of consumers. In assessing whether there are grounds for exercising such powers in connection with a reattribution , the FSA will have regard to whether or not a firm has acted in accordance with the guidance in this section and, if a firm has not done so, whether it has been able to demonstrate that compliance with that guidance would have been inappropriate or impracticable in its particular circumstances.

Policyholder advocate: appointment and function

COB 6.13.8R

A firm that is seeking to make a reattribution of its inherited estate must appoint a policyholder advocate to negotiate with the firm on behalf of relevant with-profits policyholders.

COB 6.13.9R

The policyholder advocate must be nominated or approved by the FSA before he is appointed.

COB 6.13.10G

The FSA is likely to nominate a policyholder advocate if it considers that the reattribution, or any part of it, is likely to be complex or controversial. If the FSA does not nominate a person to be the policyholder advocate , the firm should nominate a suitable candidate for FSA approval.

COB 6.13.11G

The FSA expects the policyholder advocate to be a natural person who:

  1. (1)

    is free from any conflict of interest that might be, or might appear to be, detrimental to the interests of policyholders; and

  2. (2)

    has the skills and knowledge necessary to act as the policyholder advocate on the proposed reattribution.

COB 6.13.12G

The FSA may wish to have preliminary discussions with the policyholder advocate nominated by the firm to help the FSA to determine whether he is suitably qualified and experienced to act as the policyholder advocate for the proposed reattribution. The FSA will consider the suitability of the nominee and inform the firm that nominated him whether it approves him. Since the nature of the proposed reattribution is a factor in determining the suitability of the nominee, the FSA cannot approve a nominee before a broad outline of the reattribution has been determined. If the FSA rejects a nominee it will normally tell him why it has done so and, if the nominee agrees, the FSA will also tell the firm.

COB 6.13.13G

The FSA considers that it is desirable for a firm to include an independent element in the policyholder advocate selection process. That might include consulting representative groups of policyholders or using the services of a recruitment consultant. When considering an application for approval of a nominee to perform the policyholder advocate role, the FSA will have regard to the extent to which the firm has involved others in the selection process.

COB 6.13.14G

The precise role of the policyholder advocate in any particular case will depend on the nature of the firm and the reattribution proposed. A firm will need to discuss with the FSA the precise role of the policyholder advocate in a particular case. However, the role of the policyholder advocate should include:

  1. (1)

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

  2. (2)

    commenting, to with-profits policyholders, on:

    1. (a)

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

    2. (b)

      the criteria used for determining the eligibility of the firm's various with-profits policyholders;

    3. (c)

      the terms and conditions of the proposals (to the extent that they have a material effect on the value of the benefits to be offered, or on the bonuses that may be added to with-profits policies); and

    4. (d)

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

  3. (3)

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

Policyholder advocate: terms of appointment

COB 6.13.15R

A firm must 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.

COB 6.13.16G

A firm should include with its notification:

  1. (1)

    a copy of its proposed contract with the policyholder advocate;

  2. (2)

    a copy of its proposed terms of reference for the policyholder advocate;

  3. (3)

    details of the proposed negotiation timetable and the policyholder advocate's budget;

  4. (4)

    the policyholder advocate's confirmation that he is content with the proposed contract, terms of reference, plan and budget, if he is, or with a summary of his reservations, if he is not; and

  5. (5)

    any other information that the FSA may reasonably require when it considers the proposed terms of appointment for the policyholder advocate.

COB 6.13.17G

The FSA will respond to the firm , including by giving guidance (if appropriate), as soon as it has reached a view on the proposed terms of appointment.

COB 6.13.18R

A firm must ensure that the terms of appointment for the policyholder advocate:

  1. (1)

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

  2. (2)

    define the relationship of the policyholder advocate to the firm and its policyholders respectively;

  3. (3)

    set out the arrangements under which the policyholder advocate is to communicate with policyholders;

  4. (4)

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

  5. (5)

    specify when and how the policyholder advocate's appointment may be terminated.

COB 6.13.19R

A firm must ensure that the policyholder advocate's terms of appointment allow him to communicate freely and, at his discretion, in confidence with the FSA.

COB 6.13.20G

It may be necessary, or desirable, for the policyholder advocate to discuss the terms of the proposed reattribution directly with the FSA , or for him to be able to participate in the FSA's meetings with the firm. COB 6.13.19 R is intended to ensure that the policyholder advocate is free to do that whenever he, or the FSA, regards that as necessary or appropriate.

COB 6.13.21G

A firm may agree to include, within the terms of appointment for the policyholder advocate , arrangements for the policyholder advocate to be indemnified in respect of certain claims that may be made against him in connection with the performance of his functions. If such indemnity is given, it should not include protection against any liability arising from acts of bad faith.

Reattribution expert

COB 6.13.22R

Where a firm is not otherwise required to appoint an independent expert to assess its reattribution proposals, it must appoint an expert (referred to as the 'reattribution expert') to undertake an objective assessment of them, taking into account:

  1. (1)

    the nature and extent of any restructuring of the firm'swith-profits fund;

  2. (2)

    the benefits that will be allocated to relevant with-profits policyholders in exchange for the rights and interests they are being asked to give up; and

  3. (3)

    any other factors that may be regarded as material by the FSA or the expert.

COB 6.13.23G

Many transactions involving a reattribution will involve an insurance business transfer scheme that requires court approval under Part VII of the Act . In those cases, the firm will be required to appoint an independent expert who has the responsibilities set out in the Act and SUP 18. The independent expert's function is to assess objectively, and then prepare a report on, the relevant insurance business transfer scheme for the benefit of the court, although the firmwith-profits policyholders , others affected by the scheme and the FSA will, or may, also rely on it. The reattribution expert's function is broadly the same and it contrasts with the role of the policyholder advocate, who is appointed primarily to negotiate the benefits to be given to with-profits policyholders in exchange for the rights and interests they are being asked to give up.

COB 6.13.24R

A firm must not appoint a reattribution expert who has not been nominated or approved by the FSA to act as an expert in relation to the firm's proposed reattribution.

COB 6.13.25R

If a firm appoints a reattribution expert, it must ensure that the expert's terms of appointment allow him to communicate freely and, at his discretion, in confidence with the FSA.

COB 6.13.26G

The FSA expects a reattribution expert to be a natural person who:

  1. (1)

    is free from any conflict of interest that might, or might appear to, undermine his independence or the quality of his report;

  2. (2)

    has relevant knowledge, both practical and theoretical, and experience of the types of insurance business transacted by the firm; and

  3. (3)

    is an actuary familiar with the role and responsibilities of an actuary appointed under SUP 4 (Actuaries).

COB 6.13.27G

The general principles in SUP 5.4.8 G, regarding the suitability of a skilled person , also apply to the appointment of a reattribution expert.

COB 6.13.28G

A firm should co-operate fully with a reattribution expert and provide him with access to all relevant information and appropriate staff.

COB 6.13.29R
  1. (1)

    A firm that appoints a reattribution expert must require him to prepare a report.

  2. (2)

    The report required by COB 6.13.29 R (1) must be made available to the FSA , the policyholder advocate and the court (if it is relevant to any court proceedings).

  3. (3)

    An adequate summary of the report required by COB 6.13.29 R (1) must also be made available to the firm with-profits and other policyholders.

COB 6.13.30G

A reattribution expert's report, required by COB 6.13.29 R (1), should comply with the applicable rules on expert evidence and contain the following information:

  1. (1)

    the information detailed in SUP 18.2.33 G (1) to (10), (12) and (13), and SUP 18.2.39 G; and

  2. (2)

    his opinion of the likely effect of the proposals on with-profits policyholders or, where relevant, each relevant group of with-profits policyholders, having particular regard, where relevant, to the matters set out in SUP 18.2.36 G, as if in each case, a reference to:

    1. (a)

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

    2. (b)

      the 'independent expert' was a reference to the 'reattribution expert'; and

    3. (c)

      the 'scheme' was a reference to the proposal for a 'reattribution'.

COB 6.13.31G

The amount of detail that it is appropriate to include in the report required by COB 6.13.29 R (1) will depend on the complexity of the proposals, the materiality of the details themselves and the circumstances.

COB 6.13.32G

Where the proposal for a reattribution forms part of a wider proposal for restructuring, it may not be appropriate to consider the reattribution in isolation. In those cases, the reattribution expert should seek a sufficient explanation of the firm's plans to enable him to understand, and report on, the wider picture.

Negotiation timetable

COB 6.13.33G

When a firm decides, in principle, to appoint a policyholder advocate , it should give him sufficient time to select the professional advisers he regards as necessary to enable him to perform his functions. It should also give him an opportunity to make preliminary enquiries about the firm, its long-term insurance fund, the nature of its proposals and the factual background to them.

COB 6.13.34G

At an appropriate time, a firm should announce the appointment of the policyholder advocate , marking the formal start of the negotiations. In the first instance, the arrangements under which a policyholder advocate is appointed should require him to take such steps as he considers necessary to communicate with, and receive views from, relevant with-profits policyholders about the proposed reattribution . Only when he is satisfied that he has had adequate time to communicate with relevant with-profits policyholders should a policyholder advocate expect, or be expected, to begin negotiations with a firm.

COB 6.13.35G

The FSA would not normally expect the period from the announcement of the appointment of a policyholder advocate to the conclusion of a prospective deal to be less than three months.

Information to policyholders: the policyholder advocate and the negotiations

COB 6.13.36R

A firm must make arrangements so that every policyholder that might be affected by the proposed reattribution will receive appropriate information about the reattribution process, and any offer that will be made to him, in a timely way.

COB 6.13.37G

Relevant with-profits policyholders should be given clear information about the proposals, including an explanation of the wider picture, for example if the reattribution is linked to the restructuring of a firm.

COB 6.13.38G

When a firm makes information available to its policyholders, it should have regard to Principle 7 (Communications with customers). It should also explain the benefits and disbenefits of its proposals, for each relevant group of policyholders and for the firm if, and to the extent that, that is appropriate in the context of the information that it will be providing at any particular time.

COB 6.13.39G

The information given to policyholders should explain the role and background of the individuals who have been appointed to perform particular functions, including those of the policyholder advocate and the independent expert or the reattribution expert, as the case may be.

COB 6.13.40G

The information should also explain the steps in the reattribution process, the timetable for the proposed reattribution and any interdependencies. A firm should also consider the information needs of policyholders who will not be directly affected by the firm's proposals.

COB 6.13.41G

A firm should ensure that appropriate arrangements are put in place for policyholders of the firm to have access to further information, including over the internet and through helplines. These should remain operational throughout the reattribution process and be able to provide policyholders with information on demand. A firm should take reasonable steps to ensure that the information provided to policyholders is kept up-to-date.

COB 6.13.42G

The FSA does not consider it necessary for policyholders to receive regular updates on the progress of negotiations between the firm and the policyholder advocate if they are completed within a relatively short timescale. However, in the case of protracted negotiations, policyholders should receive an update at least every six months , commencing with the announcement of the appointment of the policyholder advocate (see COB 6.13.34 G).

Notification to policyholders: conclusion of negotiations and consent

COB 6.13.43R

When a firm and a policyholder advocate complete their negotiations about the benefits that will be offered to relevant with-profits policyholders , in exchange for the rights and interests they will be asked to give up, the firm must:

  1. (1)

    tell relevant policyholders that the firm and the policyholder advocate have completed their negotiations;

  2. (2)

    explain the outcome of the negotiations and, if appropriate, the firm's final proposals for the reattribution; and

  3. (3)

    give relevant with-profits policyholders the chance to:

    1. (a)

      individually accept or reject those proposals; or

    2. (b)

      (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.

COB 6.13.44G

A firm should also:

  1. (1)

    explain the essence of its proposals, including details of:

    1. (a)

      the context or background to the proposals and how the final version has been arrived at; and

    2. (b)

      any material changes or departures from the information that it has already supplied;

  2. (2)

    explain the effect of the negotiations on policyholders, including a description of any benefits they are likely to receive and the rights and interests that they are likely to be asked to give up;

  3. (3)

    include a report from the policyholder advocate , which explains the basis of his negotiations with the firm, whether he considers that the firm proposals are in the interests of relevant with-profits policyholders , or groups of with-profits policyholders, and gives reasons for the conclusions that he has reached; and

  4. (4)

    include information about the report by the independent expert or the reattribution expert, as the case may be, including a summary of the report and details of how policyholders can obtain a copy of the full report, if they wish to do so (see COB 6.13.29 R).

COB 6.13.45G

The reattribution process may redefine the rights of certain parties. There are established legal processes that enable such rights to be redefined by majority vote. If a firm proposes a reattribution that follows some other process, the FSA considers that, for that reattribution to be fair, policyholders should be given the chance to decide whether or not to accept the firm's proposals and, if they decide not to accept, their existing rights should be protected. The FSA therefore expects firms to offer individual choice, or to follow an established legal process where the majority can bind the minority (with the sanction of the court, if applicable).

COB 6.13.46R

If a firm chooses to make an offer to its policyholders , when the firm and the policyholder advocate have not been able to agree the value of the benefits to be offered to with-profits policyholders in return for the rights and interests they are being asked to give up, it must also explain the fact of, and reasons for, the policyholder advocate's disagreement.

COB 6.13.47G

Where a firm proposes an elective process under COB 6.13.43 R (3)(a), and a minority do not accept the proposals in the first instance, the FSA would expect the firm to make arrangements to allow those policyholders a further opportunity to elect to be a party to the reattribution at a later date.

COB 6.13.48G

Where a proposal is put to the vote of policyholders in accordance with COB 6.13.43 R (3)(b):

  1. (1)

    the voting arrangements should allow relevant with-profits policyholders the opportunity to vote by post or, if the vote is to take place at a meeting, for those policyholder to be able to appoint proxies to represent their views; and

  2. (2)

    the notice period, the closing date for votes submitted by post or, as the case may be, the time for appointing proxies should normally be at least eight weeks after the prospective deal has been announced.

COB 6.13.49R

Before, or at the same time as giving notice to relevant with-profits policyholders of an invitation to accept the offer under COB 6.13.43 R (3)(a) or an invitation to vote under COB 6.13.43 R (3)(b), a firm must send out details of the individual benefits to be received by each relevant with-profits policyholder in exchange for the rights or interests they are being asked to give up.

Notification to policyholders: final outcome

COB 6.13.50G

A firm should, within a reasonable time, notify policyholders of the final outcome of the reattribution process. This should normally be done after the court has considered the proposed reattribution, if court sanction is required.

COB 6.13.51G

Provided that any court hearing is due to take place within a reasonable time once the outcome of the vote is known (see COB 6.13.43 R (3)(b)), the FSA does not consider it necessary for a firm to write individually to policyholders to explain the outcome of that vote. However, a firm should make the information publicly available, for example by putting a notice on its website, by giving details through its helpline, or by placing an advertisement in the national or regional press.

Limits on the need to provide information

COB 6.13.52R

COB 6.13.36 R, COB 6.13.43 R, COB 6.13.46 R and COB 6.13.49 R do not require a firm to disclose confidential, or commercially sensitive, information nor do they require a firm to disclose information that relates to a third party or is irrelevant to its reattribution proposals or arrangements.

COB 6.13.53G

A firm will not be treated as having failed to comply with any obligation in this section to provide information if the information has been provided to relevant with-profits policyholders by another person , such as the policyholder advocate, the independent expert or the reattribution expert.

General costs

COB 6.13.54G

Subject to COB 6.13.55 G to COB 6.16.58G, 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.

Policyholder advocate costs

COB 6.13.55G

The policyholder advocate's budget, and the policyholder advocate's costs, should be agreed between the firm and the policyholder advocate. For these purposes, the policyholder advocate's costs include ancillary costs, such as the costs of professional advice and administrative and publicity costs.

COB 6.13.56G

The FSA recognises that the treatment of costs will almost certainly affect the value of the benefits offered. The FSA will not normally seek to restrict the way in which policyholder advocate costs are divided between shareholders and policyholders, provided that:

  1. (1)

    the shareholder pays a reasonable proportion of them;

  2. (2)

    the arrangements are fair; and

  3. (3)

    the policyholder advocate confirms that he is satisfied with them.

COB 6.13.57G

A firm may therefore agree an arrangement with the policyholder advocate by which relevant with-profits policyholders contribute to the policyholder advocate's costs, for example by a deduction from the aggregate value of the benefits that will become available to those policyholders.

COB 6.13.58G

A firm might also propose a budget that it will fund entirely, or in part, from shareholder funds with any additional expenditure being met from funds attributable to relevant with-profits policyholders. Another approach would be cost sharing, so that a firm and relevant with-profits policyholders will benefit if savings are made, compared to the budget, and costs are shared if the budget is exceeded.

COB 6.13.59G

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.