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COBS 20.5 With-profits governance

Requirement to appoint a with-profits committee or advisory arrangement

COBS 20.5.1R

1A firm must, in relation to each with-profits fund it operates:

  1. (1)

    appoint:

    1. (a)

      a with-profits committee; or

    2. (b)

      a with-profits advisory arrangement (referred to in this section as an ‘advisory arrangement’), but only if appropriate, in the opinion of the firm's governing body, having regard to the size, nature and complexity of the fund in question;

  2. (2)

    ensure that the with-profits committee or advisory arrangement operates in accordance with its terms of reference; and

  3. (3)

    make available a copy of any terms of reference on the firm's website, or if the firm does not have a website, at the request of policyholders.

COBS 20.5.2G
  1. (1)

    Ultimate responsibility for managing a with-profits fund rests with the firm through its governing body. The role of the with-profits committee or advisory arrangement is, in part, to act in an advisory capacity to inform the decision-making of a firm's governing body. The with-profits committee or advisory arrangement also acts as a means by which the interests of with-profits policyholders are appropriately considered within a firm's governance structures. The with-profits committee or advisory arrangement should address issues affecting policyholders as a whole or as separately identifiable groups of policyholders generally rather than dealing with individual policyholder complaints or taking management decisions with respect to a with-profits fund.

  2. (2)

    If a firm considers that it is appropriate to appoint an advisory arrangement, a firm's governing body will need to decide whether it is appropriate to appoint an independent person or one or more non-executive directors to carry out the role. The FCA expects firms to make this determination according to the nature, size and complexity of the fund in question. So the larger or more complex the fund is, the more likely it would be that it would be appropriate to appoint an independent person.

  3. (3)

    Where a firm has appointed a with-profits committee to one of its with-profits funds it may also decide to appoint that with-profits committee to some or all of its other with-profits funds, even if the firm would not have determined it appropriate to appoint a with-profits committee to those other funds when considered individually having regard to their size, nature or complexity.

Terms of reference of with-profits committee or advisory arrangement

COBS 20.5.3R

A firm must ensure that the terms of reference contain, as a minimum, terms having the following effect:

  1. (1)

    the role of the with-profits committee or advisory arrangement is, as relevant, to assess, report on, and provide clear advice and, where appropriate, recommendations to the firm's governing body on:

    1. (a)

      the way in which each with-profits fund is managed by the firm and, if a PPFM is required, whether this is properly reflected in the PPFM;

    2. (b)

      if applicable, whether the firm is complying with the principles and practices set out in the PPFM;

    3. (c)

      whether the firm has addressed effectively the conflicting rights and interests of with-profits policyholders and other policyholders or stakeholders including, if applicable, shareholders, in a way that is consistent with Principle 6 (treating customers fairly); and

    4. (d)

      any other issues with which the firm's governing body, with-profits committee or advisory arrangement considers with-profits policyholders might reasonably expect the with-profits committee or advisory arrangements to be involved;

  2. (2)

    that the with-profits committee or advisory arrangement must:

    1. (a)

      decide on the specific matters it will consider in order to enable it to carry out its role described in (1)(a) to (d) as appropriate to the particular circumstances of the with-profits fund(s); and

    2. (b)

      in any event give appropriate consideration to the following non-exhaustive list of specific matters:

      1. (i)

        the identification of surplus and excess surplus, the merits of its distribution or retention and the proposed distribution policy;

      2. (ii)

        how bonus rates, smoothing and, if relevant, market value reductions have been calculated and applied;

      3. (iii)

        if relevant, the relative interests of policyholders with and without valuable guarantees;

      4. (iv)

        the firm's with-profits customer communications such as annual policyholder statements and product literature and whether the with-profits committee or advisory arrangement wishes to make a statement or report to with-profits policyholders in addition to the annual report made by a firm;

      5. (v)

        any significant changes to the risk or investment profile of the with-profits fund including the management of material illiquid investments and the firm's obligations in relation to strategic investments;

      6. (vi)

        the firm's strategy for future sales supported by the assets of the with-profits fund and its impact on surplus;

      7. (vii)

        the impact of any management actions planned or implemented;

      8. (viii)

        relevant management information such as customer complaints data (but not necessarily information relating to individual customer complaints);

      9. (ix)

        the drafting, review, updating of and compliance with run-off plans, court schemes and similar matters;

        2
      10. (x)

        the costs incurred in operating the with-profits fund;

      11. (xi)

        the identification and extent of the firm's with-profits funds, with particular regard to the considerations as to whether a part of the with-profits fund constitutes a separate with-profits fund in accordance with COBS 20.1A.2 R (Sub-funds); and2

      12. (xii)

        the use and purpose of, and terms under which, support assets are available to the with-profits fund, having regard to the considerations in COBS 20.2.33 G to COBS 20.2.34 G and COBS 20.2.34A R.2

  3. (3)

    that any person appointed as a member of the with-profits committee or as a person carrying out the advisory arrangement must have the appropriate skills, knowledge and experience to perform, or contribute to, as appropriate, the role set out in (1) and (2);

  4. (4)

    if the firm appoints a with-profits committee:

    1. (a)

      that there must be three or more members;

    2. (b)

      that the quorum for any meeting (or decision by written procedure) must be at least half of the number of, and no less than two, members; and

  5. (5)

    that the with-profits committee or advisory arrangement must:

    1. (a)

      advise the governing body on the suitability of candidates proposed for appointment as the with-profits actuary; and

    2. (b)

      assess the performance of the with-profits actuary at least annually, and report its view to the governing body of the firm.

COBS 20.5.4G
  1. (1)

    The FCA expects that a with-profits committee will meet at least quarterly and ad hoc if required.

  2. (2)

    The FCA expects that, in general, a with-profits committee or advisory arrangement will work closely with the with-profits actuary, and obtain his opinion and input as appropriate.

Role of with-profits committee or advisory arrangement in the firm’s governance

COBS 20.5.5R

A firm must:

  1. (1)

    ensure that its governing body, in the context of its consideration of issues referred to in COBS 20.5.3R (1)(a) to (d) and (2)(b)(i) to (x):

    1. (a)

      obtains, as relevant, assessments, reports, advice and/or recommendations of the with-profits committee or advisory arrangement, if the governing body, the with-profits committee or advisory arrangement considers that significant issues concerning the interests of with-profits policyholders need to be considered by the firm;

    2. (b)

      allows the with-profits committee or advisory arrangement sufficient time to enable it to provide fully considered input on the issues to be considered;

    3. (c)

      considers fully and gives due regard to the input of the with-profits committee or advisory arrangement when determining issues concerning the management of the with-profits funds and the interests of with-profits policyholders;

    4. (d)

      if the governing body decides to depart in any material way from the advice or recommendations of the with-profits committee or advisory arrangement, sets out fully its reasons and allows the with-profits committee or advisory arrangement a reasonable period to consider them and respond; and

    5. (e)

      considers any further representations from the with-profits committee or advisory arrangement and, if appropriate, sets out fully any additional reasons if it continues to depart from the with-profits committee or advisory arrangement’s advice or recommendation;

  2. (2)

    provide a with-profits committee or advisory arrangement with sufficient resources as it may reasonably require to enable it to perform its role effectively;

  3. (3)

    notify the FCA of the decision of the governing body to depart from the advice or recommendation of the with-profits committee or advisory arrangement if the with-profits committee or advisory arrangement considers that the issue is sufficiently significant and requests of the governing body that the FCA be informed; and

  4. (4)

    consult the with-profits actuary on the appointment of a new member of the with-profits committee or of the person or persons carrying out the advisory arrangement.

COBS 20.5.6G
  1. (1)

    COBS 20.5.5R (2) requires that a firm provides a with-profits committee or advisory arrangement with sufficient resources. A with-profits committee or advisory arrangement should be able to obtain external professional, including actuarial, advice, at the expense of the firm, if the with-profits committee or advisory arrangement considers the advice to be necessary to perform its role effectively. In a proprietary firm the with-profits committee or advisory arrangement should be able to request that the cost of the external professional advice either is not chargeable to the with-profits fund in question, or is shared with the with-profits fund, according to whether the issue under consideration is wholly or partly to the benefit of the firm rather than policyholders. A with-profits committee or advisory arrangement should also be adequately supported by the firm's own internal resources and support functions. This may include the firm ensuring that relevant employees, including the with-profits actuary, are made sufficiently available, and provide relevant information and input, to assist the with-profits committee in its role, as required.

  2. (2)

    If the with-profits committee or advisory arrangement wishes to make a statement or report to with-profits policyholders in addition to the annual report made by a firm, the effect of COBS 20.5.5R (2) is that a firm will need to facilitate this.

  3. (3)

    In order to comply with SYSC 3.2.20 R the FCA expects firms to keep full records of all requests of, and material produced by, the with-profits committee or advisory arrangement, and of all decisions and reasons of the governing body as described in COBS 20.5.5R (1)(d) and (e).

  4. (4)

    For the purposes of COBS 20.5.5R (3), the FCA expects that it will only be in exceptional circumstances that a with-profits committee or alternative arrangement will consider a departure from a recommendation or advice to be sufficiently significant to warrant its making a request of the governing body that the FCA be informed.

Assessment of independence by governing body

COBS 20.5.7G
  1. (1)

    The FCA expects the governing body of the firm to decide whether a member of the with-profits committee or a person (other than a non-executive director) carrying out the advisory arrangement is independent. The FCA expects a firm's governing body to adopt the following approach and have regard to the following factors when making this assessment:

    1. (a)

      the governing body should determine whether the person is independent in character and judgment and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the person’s judgment; and

    2. (b)

      the governing body should state its reasons if it determines that a person is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, including if the person:

      1. (i)

        has been an employee of the firm or group within the last five years; or

      2. (ii)

        has, or has had within the last three years, a material business relationship with the firm either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the firm; or

      3. (iii)

        has received or receives additional remuneration from the firm, participates in the firm's share option or a performance-related pay scheme, or is a member of the firm's pension scheme; or

      4. (iv)

        has close family ties with any of the firm's advisers, directors or senior employees; or

      5. (v)

        has significant links with the firm's directors through involvement in other companies or bodies; or

      6. (vi)

        represents a significant shareholder; or

      7. (vii)

        has served on the governing body for more than nine years from the date of their first election.

  2. (2)

    If a firm appoints one or more non-executive directors to carry out the advisory arrangement, the FCA expects the governing body of the firm to be satisfied that that person or persons is or are adequately able to provide independent judgment.

Governance arrangements in relation to the PPFM

COBS 20.5.8G

In complying with the rule on systems and controls in relation to compliance, financial crime and money laundering (SYSC 3.2.6 R), a firm should maintain governance arrangements designed to ensure that it complies with, maintains and records, any applicable PPFM. These arrangements should:

  1. (1)

    be appropriate to the scale, nature and complexity of the firm's with-profits business; and

  2. (2)

    include the approval of the firm's PPFM by its governing body.