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COBS 20.1 Application

COBS 20.1.1 R RP

1This chapter applies to a firm carrying on with-profits business, except to the extent modified in the following rules.

COBS 20.1.2 R RP
  1. (1)

    The section on the process for reattribution (COBS 20.2.42 R to COBS 20.2.52 G):

    1. (a)

      applies to a firm that is proposing to make a reattribution of its inherited estate;

    2. (b)

      but not 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.

  2. (2)

    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 on reattribution (COBS 20.2.42 R to COBS 20.2.52 G) (through, or because of, the exception in (1)(b)), the firm must:

    1. (a)

      tell the appropriate regulator that that is what it proposes to do;

    2. (b)

      seek the order at the earliest opportunity; and

    3. (c)

      if it wishes to take a step that would be contrary to those rules in anticipation of such an order, secure a waiver before it does so.

COBS 20.1.3 R RP

For an EEA insurer:

  1. (1) 4
    1. (a)

      the rules and guidance on the with-profits fund (COBS 20.1A), on treating with-profits policyholders fairly (COBS 20.2.1 G to COBS 20.2.41 G and COBS 20.2.53 R to COBS 20.2.60 G), and the governance provisions in COBS 20.5. apply only in so far as responsibility for the matter in question has not been reserved to the firm'sHome State regulator by an EU instrument;4

    notwithstanding the above:

    1. (b)

      COBS 20.2.26A R (financial penalties and the with-profits fund) applies;4

    2. (c)

      the rules and guidance on the notification of policyholders where there is a change in the percentage allocation of distributions (COBS 20.2.19A R to COBS 20.2.19C G) apply but only to the extent that the UK is the State of the commitment;4

  2. (2)

    COBS 20.3 (Principles and Practices of Financial Management) does not apply;

  3. (3)

    the rule on providing information to with-profits policyholders where the United Kingdom is the State of the commitment4 (COBS 20.4.4 R) applies5, but the rest of COBS 20.4 (Communications with with-profits policyholders) does not; and5

    44
  4. (4)

    [deleted]5

    44
  5. (5)

    references in COBS 20 to a with-profits fund or to terms derived from the Solvency II Directive requiring transposition in the Home State, apply as if they were references to the relevant fund or terms established in accordance with the requirements of the Home State.4

COBS 20.1.4 R RP

The following do not apply to a non-directive friendly society:

  1. (1)

    COBS 20.3 (Principles and Practices of Financial Management);

    3
  2. (2)

    COBS 20.4 (Communications with with-profits policyholders); and3

  3. (3)

    COBS 20.5 (With-profits governance).3

COBS 20.1.5 R RP

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

COBS 20.1A The with-profits fund1

‘Other liabilities’ in the with-profits fund

COBS 20.1A.1 R RP

For the purposes of calculating any with-profits funds surplus and the rules and guidance in COBS 20, including COBS 20.1A.5 R, COBS 20.1A.6 R and COBS 20.2.17C R, a firm must include the following non-exhaustive list as ‘other liabilities’:

  1. (1)

    liabilities arising from its regulatory duty to treat customers fairly (where not already included in technical provisions); and

  2. (2)

    the value of any prospective future transfers out of the with-profits fund properly attributable to shareholders in accordance with COBS 20.

Sub-funds

COBS 20.1A.2 R RP
  1. (1)

    Where the firm:

    1. (a)

      identifies particular assets as forming a distinct part of its with-profits fund; and

    2. (b)

      restricts participation in the profits or other experience of that distinct part of the fund to a particular category of with-profits policies;

    then, provided that:

    1. (c)

      such identification and restriction is consistent with the considerations in (3), and

    2. (d)

      the firm treats each affected category of with-profits policyholder fairly, having regard to those considerations;

    each such part constitutes a separate with-profits fund.

  2. (2)

    Notwithstanding (1), each different part of its with-profits fund constitutes a separate with-profits fund if that is necessary in order to treat each affected category of with-profits policyholder fairly, having regard to the considerations in (3).

  3. (3)

    The considerations referred to in (1) and (2) are the terms of the relevant with-profits policies; the firm's established practice; its PPFM and/or other relevant communications to affected with-profits policyholders, and the terms of any arrangement formally approved by a court of competent jurisdiction, appropriate regulator or previous regulator.

COBS 20.1A.3 R RP
  1. (1)

    For a Solvency II firm operating a with-profits fund prior to 1 January 2016:

    1. (a)

      assets in the with-profits fund held in accordance with INSPRU on 31 December 2015 are deemed to be items in a with-profits fund for the purposes of COBS 20 from 1 January 2016, provided that any transfers out of, and any outgoings from, the fund up to 31 December 2015 were made in accordance with, and/or do not as at 31 December 2015, constitute, or continue to constitute, a breach of INSPRU 1.5.21 R and INSPRU 1.5.27 R;

    2. (b)

      any assets transferred out of the fund in breach of INSPRU 1.5.21 R and INSPRU 1.5.27 R are deemed not to have been transferred out of the fund and remain part of the with-profits fund;

    3. (c)

      to the extent that the assets in (b) have also been transferred out of the firm then, before (a) can apply to the firm, the firm must transfer into the with-profits fund assets equal to the value of the assets referred to in (b), and of a similar quality, having regard to the PRA Rulebook: Solvency II Firms: Investments.

  2. (2)

    Firms to which (1)(a) applies must, in any event, comply with COBS 20.1A.2 R. Paragraph (1)(a) does not apply to the extent that it would be inconsistent with the operation of COBS 20.1A.2 R where the effect is to require a firm to create or make changes to sub-funds amounting to separate with-profits funds.

Governance arrangements for the with-profits fund

COBS 20.1A.4 R RP

A Solvency II firm effecting or carrying out with-profits insurance business must identify the assets relating to all the business written in, or transferred into, each with-profits fund which it is required to hold under COBS 20.1A.5 R or PRA Rulebook: Solvency II firms: With Profits rule 2.1.

COBS 20.1A.5 R RP

A Solvency II firm must ensure that it holds assets in each of its with-profits funds of a value at least sufficient to cover the "with-profits policy liabilities" defined in the PRA Rulebook: Glossary and as required by PRA Rulebook: Solvency II firms: With Profits rule 2.1, and any other liabilities in respect of all of the business written in, or transferred into, that with-profits fund.

COBS 20.1A.6 R RP

A Solvency II firm must maintain separate accounting records for each of its with-profits funds. The accounting records must identify:

  1. (1)

    all of the assets of that with-profits fund;

  2. (2)

    the best estimate component of technical provisions for the with-profits policies written in, or transferred into, that with-profits fund;

  3. (3)

    the best estimate component of technical provisions for the non-profit insurance contracts written in, or transferred into, that with-profits fund;

  4. (4)

    any other liabilities of the with-profits fund not covered by (2) or (3), and their value calculated in accordance with PRA Rulebook: Solvency II Firms: Valuation and applicable parts of the Solvency II Regulation (EU) 2015/35 of 10 October 2014.

COBS 20.1A.7 G RP

A Solvency II firm must ensure that the assets in its with-profits funds are separately identified and allocated to the relevant with-profits fund at all times. Assets in external accounts (e.g. with banks, custodians, or brokers) should be segregated in the firm's books and records into separate accounts for with-profits insurance business and other business. Where a firm has more than one with-profits fund, separate accounting records must be maintained for each fund. Accounting records should clearly document the allocation.

COBS 20.1A.8 R RP

A Solvency II firm must not transfer assets out of a with-profits fund unless:

  1. (1)

    the assets represent any part of a with-profits fund surplus, or represent assets held in accordance with COBS 20.1A.5 R in relation to the part of a distribution that has been made which is properly attributable to shareholders, in accordance with COBS 20; and

  2. (2)

    no more than three months have passed since the actuarial investigation determining that surplus.

COBS 20.1A.9 G RP

For the purposes of COBS 20.1A.8 R, an actuarial investigation is required to determine any with-profits fund surplus for the requirements in COBS 20 and remains in-date for three months from the date when the determination of the surplus was made. However, even where the investigation is still in-date, the firm should not make the transfer unless there is sufficient surplus at the time of the transfer to cover the value of the assets being transferred. The actuarial investigation carried out may rely, in part, on any relevant and sufficiently up-to-date valuation exercise carried out for the purposes of calculating technical provisions under the PRA Rulebook: Solvency II Firms: Technical Provisions and applicable parts of the Solvency II Regulation (EU) 2015/35 of 10 October 2014, provided that the person carrying out the actuarial investigation considers it appropriate to do so.

COBS 20.1A.10 R RP
  1. (1)

    A Solvency II firm must use or apply an asset in a with-profits fund only for the purpose of the business in the with-profits fund.

  2. (2)

    For the purpose of (1), applying or using an asset includes any obligation (even if only contingent) to apply or use that asset.

COBS 20.1A.11 R RP

A Solvency II firm must not agree to, or allow, any mortgage or charge on the assets in any of its with-profits funds, other than in respect of, and for the purposes of, the business in the with-profits fund.

COBS 20.1A.12 G RP

References in COBS 20.1A.10 R and COBS 20.1A.11 R to ‘the purposes of the business’ in the with-profits fund include the payment of claims, expenses and liabilities arising from that business, the acquisition of lawful access to fixed assets to be used in that business and the investment of assets. The payment of liabilities may include repaying a loan but only where that loan was incurred for the purpose of the business written into the with-profits fund. The purchase or investment of assets may include an exchange at fair market value of assets (including cash) between the with-profits fund and other assets of the firm. A Solvency II firm may also lend securities held in a with-profits fund under a stock lending transaction, or transfer assets as collateral for a stock lending transaction, where the firm is the borrower and where such lending or transfer is for the benefit of the business written into the with-profits fund.

Management of the with-profits fund

COBS 20.1A.13 R RP

A firm, other than a non-directive friendly society,2 which is subject to contractual terms providing for payments under a capital instrument included in that insurer's own funds2, must:

  1. (1)

    manage any with-profits fund so that discretionary benefits under a with-profits policy are calculated and paid, disregarding, insofar as is necessary for its customers to be treated fairly, any requirements in such contractual terms whether or not they are absolute, contingent or at the discretion of the firm; and

  2. (2)

    disclose its intention to manage the with-profits fund on the basis set out in (1) in the firm'sPPFM.

COBS 20.1A.14 G RP
  1. (1)

    A firm, other than a non-directive friendly society,2 is expected to manage its with-profits fund so that amounts (whether interest, principal, or other outgoings) payable by the firm under a capital instrument included in that insurer's own funds2 (as determined in accordance with the PRA Rulebook: Solvency II Firms: Own Funds or Non-Solvency II firms: Insurance Company – Capital Resources2) do not impact on the with-profits fund's assets or on the firm's ability to declare and pay under a with-profits policy discretionary benefits that are consistent with the firm's obligations under Principle 6 (Customers' interests).

  2. (2)

    A firm, other than a mutual, should not regard any asset held in the with-profits fund as necessarily available to cover payments or other obligations arising under a subordinated loan.

COBS 20.1A.15 R RP

A Solvency II firm must ensure that it has adequate arrangements in place for ensuring that transactions affecting the assets of the firm operate fairly between with-profits policyholders and other persons interested in the other assets of the insurer and, where the firm has more than one with-profits fund, those transactions operate fairly between the with-profits policyholders in each of those funds.

COBS 20.2 Treating with-profits policyholders fairly

Introduction

COBS 20.2.1 G RP
2
  1. (1)

    With-profits business, by virtue of its nature and the extent of discretion applied by firms in its operation, involves numerous potential conflicts of interest that might give rise to the unfair treatment of policyholders. Potential conflicts of interest may arise between shareholders and with-profits policyholders, between with-profits policyholders and non-profit policyholders within the same fund, between with-profits policyholders and the members of mutually-owned firms, between with-profits policyholders and management, and between different classes of with-profits policyholders, for example those with and without guarantees. The rules in this section address specific situations where the risk may be particularly acute.2

  2. (2)

    With-profits policyholders have an interest in the whole and in every part of the with-profits fund into which their policies are written and from which the amounts payable in connection with their policies are to be paid. Those amounts include those required to satisfy their contractual rights and such other amounts as the firm is required to pay in order to treat them fairly (including but not limited to the amounts required to satisfy their reasonable expectations).2

  3. (3)

    The fair treatment of with-profits policyholders requires the firm's pay-outs on individual with-profits policies to be fair (see COBS 20.2.3 R et seq.) and, if the firm makes a distribution from the with-profits fund into which their policies are written, the receipt by the with-profits policyholders of at least the required percentage (see COBS 20.2.17 R).2

COBS 20.2.1A R RP

2A firm must take reasonable care to ensure that all aspects of its operating practice are fair to the interests of its with-profits policyholders and do not lead to an undisclosed, or otherwise unfair, benefit to shareholders or to other persons with an interest in the with-profits fund.

COBS 20.2.1B G RP
  1. (1)

    2Notwithstanding that there may not be a rule in the remainder of this section addressing a particular aspect of a firm's operating practices, firms will need to ensure that they take reasonable care to ensure that all aspects of their operating practice comply with COBS 20.2.1A R.

  2. (2)

    For the avoidance of doubt COBS 20.2.1A R does not exhaust or restrict the scope of Principle 6. Firms will in any event need to ensure that their operating practices are consistent with Principle 6.

COBS 20.2.1C G RP

2When considering the provisions in this chapter a firm will need to ensure that, if applicable, it complies with the with-profits governance requirements in COBS 20.5.

COBS 20.2.1D G RP

2For the purposes of COBS 20.2.1A R the FCA expects a firm to be able to demonstrate that it has taken reasonable care to ensure its operating practices are fair, including being able to produce appropriate evidence to show that it has followed relevant governance procedures.

COBS 20.2.2 R RP

Neither Principle 6 (Customers' interests) nor the rules on treating with-profits policyholders fairly (COBS 20.2) relieve a firm of its obligation to deliver each policyholder's contractual entitlement.

Amounts payable under with-profits policies

COBS 20.2.3 R RP

A firm must have good reason to believe that its pay-outs on individual with-profits policies are fair.

Amounts payable under with-profits policies: Maturity payments

COBS 20.2.4 G RP

In this section, maturity payments include payments made when a with-profits policy provides for a minimum guaranteed amount to be paid.

COBS 20.2.5 R RP
  1. (1)

    Unless a firm cannot reasonably compare a maturity payment with a calculated asset share, it must:

    1. (a)

      set a target range for the maturity payments that it will make on:

      1. (i)

        all of its with-profits policies; or

      2. (ii)

        each group of its with-profits policies;

    2. (b)

      ensure that each target range:

      1. (i)

        is expressed as a percentage of unsmoothed asset share; and

      2. (ii)

        includes 100% of unsmoothed asset share; and

    3. (c)

      manage its with-profits business, and the business of each with-profit fund, with the aim of making on each with-profit policy a maturity payment that falls within the relevant target range.

  2. (2)

    Unsmoothed asset share means:

    1. (a)

      the unsmoothed asset share of the relevant with-profits policy; or

    2. (b)

      an estimate of the unsmoothed asset share of the relevant with-profits policy derived from the unsmoothed asset share of one or more specimen with-profits policies, which a firm has selected to represent a group, or all, of the with-profits policies effected in the same with-profits fund.

  3. (3)

    A firm must calculate unsmoothed asset share by:

    1. (a) 5
      1. (i)

        for a firm which is not a Solvency II firm, applying the methods in INSPRU 1.3.119 R to INSPRU 1.3.123 R;5

      2. (ii)

        for a firm which is a Solvency II firm, applying the methods in PRA Rulebook: Solvency II Firms Valuation, Technical Provisions and Surplus Funds and applicable parts of the Solvency II Regulation (EU) 2015/35 of 10 October 2014;5

    2. (b)

      including any amounts that have been added to the policy as the result of a distribution from an inherited estate; and

    3. (c)

      subject to (d), and where the terms of the policy so provide, adding or subtracting an amount that reflects the experience of the insurance business in the relevant with-profits fund; but

    4. (d)

      if a with-profits fund has suffered adverse experience, which results from a firm's failure to comply with the rules and guidance on treating with-profits policyholders fairly (COBS 20.2.1 G to COBS 20.2.41 G and COBS 20.2.53 R to COBS 20.2.60 G), that adverse experience may only be taken into account if, and to the extent that, in the reasonable opinion of the firm'sgoverning body, the amount referred to in (c) cannot be met from:

      1. (i)

        the firm'sinherited estate (if any); or

      2. (ii)

        any assets attributable to shareholders, whether or not they are held in the relevant with-profits fund.

COBS 20.2.6 R RP

Notwithstanding that a firm must aim to make maturity payments that fall within the relevant target range, a firm may make a maturity payment that falls outside the target range if it has a good reason to believe that at least 90% of maturity payments on with-profits policies in that group have fallen, or will fall, within the relevant target range.

COBS 20.2.7 G RP

If it is not fair or reasonable to calculate or assess a maturity payment using the prescribed asset share methodology, a firm may use another methodology to set bonus rates, if that methodology properly reflects its representations to with-profits policyholders and it applies that methodology consistently.

COBS 20.2.8 R RP

A firm may make deductions from asset share to meet the cost of guarantees, or the cost of capital, only under a plan approved by its governing body and described in its PPFM. A firm must ensure that any deductions are proportionate to the costs they are intended to offset.

COBS 20.2.9 R RP

If a firm has approved a plan to make deductions from asset share, it must ensure that its planned deductions do not change unless justified by changes in the business or economic environment, or changes in the nature of the firm's liabilities as a result of policyholders exercising options in their policies.

COBS 20.2.10 R RP

If a firm calculates maturity payments using the prescribed asset share methodology, it must manage its with-profits business, and each with-profits fund, with the longer term aim that it will make aggregate maturity payments of 100% of unsmoothed asset share.

Amounts payable under with-profits policies: Surrender payments

COBS 20.2.11 G RP

A firm may use its own methodology to calculate surrender payments, but it should have good reason to believe that its methodology produces a result which, in aggregate across all similar policies, is not less than the result of the prescribed asset share methodology. A firm might, for example, test the surrender payments on a suitable range of specimen with-profits policies.

COBS 20.2.12 R RP

If a firm calculates surrender payments using the prescribed asset share methodology, it must first calculate what the surrender payment would be if it was a maturity payment calculated by that methodology.

COBS 20.2.13 R RP

A firm may then make a deduction from unsmoothed asset share if necessary, in the reasonable opinion of the firm'sgoverning body, to protect the interests of the firm's remaining with-profits policyholders.

COBS 20.2.14 G RP

Amounts that might be deducted include:

  1. (1)

    the firm's unrecovered costs, including any financing costs incurred in effecting or carrying out the surrendered with-profits policy to the date of surrender, including the costs that might have been recovered if the policy had remained in force;

  2. (2)

    costs that would fall on the with-profits fund, if the surrender value is calculated by reference to an assumed market value of assets which exceeds the true market value of those assets;

  3. (3)

    the firm's costs incurred in administering the surrender; and

  4. (4)

    a fair contribution towards the cost of any contractual benefits due on the whole, or an appropriate part, of the continuing policies in the with-profits fund which would otherwise result in higher costs falling on the continuing with-profits policies.

COBS 20.2.15 G RP

The provisions dealing with the calculation of surrender payments (COBS 20.2.11 G to COBS 20.2.12 R) do not prevent a firm from setting a target range for surrender payments where the top-end of the range is lower than the top-end of the relevant range for maturity payments.

COBS 20.2.16 R RP

A firm must not, in so far as is reasonably practicable,2 make a market value reduction to the face value of the units of an accumulating with-profits policy unless:

  1. (1)

    the market value of the with-profits assets in the relevant with-profits fund is, or is expected to be, less than the assumed value of the assets on which the face value of the units of the policy has been based; and2

    22
  2. (2)

    the market value reduction is no greater than is necessary to reflect the impact of the difference in value referred to in (1) on the relevant payment out to the policyholder.2

    2
COBS 20.2.16A G RP

2If a firm is able to satisfy COBS 20.2.16R (1), then the volume of surrenders, transfers, or other exits from the with-profits fund that there has been, or is expected to be, is a factor that a firm may take into account when it is considering whether to make a market value reduction, and if so, its amount, subject to the limit in COBS 20.2.16R (2).

Conditions relevant to distributions

COBS 20.2.16B G RP

5References to distributions in COBS 20 includes distributions of distributable profits arising, namely any permanent addition to policy benefits made at the firm's discretion based on the investment or other experience in the fund or more generally. Distributions include those relating to expected payments for which allowance has been made in the technical provisions or to a firm's other liabilities arising from its regulatory duty to treat customers fairly, and not just distributions of any with-profits fund surplus.

COBS 20.2.16C G RP

5Examples of distributions include any payment of a cash bonus (including a final bonus on exit or a reduction in premium), or a declaration of a reversionary bonus in the form of a permanent addition to the benefits guaranteed to be payable at death or on maturity. In COBS 20.2.21 R and COBS 20.2.22 E (distributions from excess surplus) distributions also include any other amounts that are added to asset shares or to any other measure that is used to determine pay-outs under policies.

COBS 20.2.17 R RP

A firm must ensure that the amount distributed to policyholders from a with-profits fund, taking into account any adjustments required by COBS 20.2.17A R,2 is not less than the required percentage of the total amount distributed.

COBS 20.2.17A R RP
  1. (1)

    2Where a firm adjusts the amounts distributed to policyholders, either by market value reduction or otherwise, in a way that would result in a distribution to policyholders of less than the required percentage, taking both the relevant distributions and the adjustment into account, then the firm must apply a proportionate adjustment to amounts distributed to shareholders so that the distribution to policyholders will not be less than the required percentage.

  2. (2)

    The adjustments referred to in (1) include but are not limited to a situation where such an adjustment has the effect of retrospectively reducing past policyholder distributions.

COBS 20.2.17B G RP

2An example of the application of COBS 20.2.17A R, without limitation to its scope generally, is where a firm reduces, for any reason, the amounts of a bonus or of bonus units added to policies in force. The firm should treat this as effectively a ‘negative distribution’, calculated by making the same assumptions regarding discount rates and other relevant factors as would be used for positive bonus additions. The amount so calculated should then be taken into account in ensuring that the amount distributed to policyholders from a with-profits fund is not less than the required percentage for the purposes of COBS 20.2.17 R.

COBS 20.2.17C R RP

7A firm must not make a distribution from a with-profits fund, unless:5

5
  1. (1)

    if it is not a Solvency II firm, the whole of the cost of that distribution can be met without eliminating the regulatory surplus in that with-profits fund; and5

  2. (2)

    if it is a Solvency II firm:5

    1. (a)

      the whole of the cost of that distribution can be met without eliminating the with-profits fund surplus in that with-profits fund; and

    2. (b)

      following any distribution that is made to meet a liability for which allowance has been made in technical provisions or other liabilities the firm is able to demonstrate that it reasonably expects to be able to continue to comply with the requirements in COBS 20.1A.5 R (Governance arrangements for the with-profits fund).

COBS 20.2.18 R RP

A firm which is not a Solvency II firm5 must not make a distribution from a with-profits fund to any person who is not a with-profits policyholder, unless the whole of the cost of that distribution (including the cost of any obligations that will or may arise from the decision to make a distribution) can be met from the excess, if any,5 of the assets over the liabilities5 in that with-profits fund.

5 5
COBS 20.2.19 R RP

A distribution to a person who is not a with-profits policyholder includes a transfer of assets out of a with-profits fund that is not made to satisfy a liability of that fund.

Notification and other requirements in relation to certain distributions

COBS 20.2.19A R RP

5If a firm which is a Solvency II firm proposes to make a distribution from a with-profits fund to any person who is not a with-profits policyholder, where:

  1. (1)

    the distribution to with-profits policyholders is smaller than the ‘pre-notification to policyholder minimum’ calculated in accordance with COBS 20.2.19BR (1) then the firm must:

    1. (a)

      provide the FCA with written details of the proposed distribution at least two months prior to the proposed distribution, together with copies of draft notifications it proposes to send to with-profits policyholders to satisfy (b); and

    2. (b)

      give affected with-profits policyholders in the fund at least one months prior written notice stating:

      1. (i)

        that it proposes to make no distribution to them; or

      2. (ii)

        that it proposes to make a distribution of an amount which is smaller than the ‘pre-notification to policyholder minimum’, and setting out the amount and how the distribution is calculated; and

      the reasons for (i) or (ii) as relevant; or

  2. (2)

    the distribution to with-profits policyholders does not meet the test in (1) but is smaller than the ‘after the event notification to policyholder minimum’ calculated in accordance with COBS 20.2.19BR (2) then the firm must:

    1. (a)

      provide the FCA with written details of the proposed distribution at least one month prior to the proposed distribution together with copies of draft notifications it proposes to send to with-profits policyholders to satisfy (b); and

    2. (b)

      give affected with-profits policyholders in the fund, notice of the distribution within a reasonable period from the date of the distribution, setting out the amount of the distribution, how it was calculated and the reasons for the change compared to the last previous distribution.

COBS 20.2.19B R RP
  1. (1)

    5The ‘pre-notification to policyholder minimum’ referred to in COBS 20.2.19A R is as follows:

    COBS20219B1

    where

    a is the total amount available for with-profits distribution in the with-profits fund in question at the time of the most recent previous distribution;

    b is the amount of the most recent previous distribution to with-profits policyholders; and

    c is the total amount available for with-profits distribution in relation to the proposed distribution.

  2. (2)

    The ‘after the event notification to policyholder minimum’ referred to in COBS 20.2.19A R is as follows:

    COBS20219B2

    where a, b and c have the same meaning as in (1).

  3. (3)

    The calculations in (1) and (2) must be determined by actuarial investigation.

COBS 20.2.19C G RP
  1. (1)

    5If the circumstances in COBS 20.2.19AR (1) or (2) arise, the firm should also consider whether any reduction(s) in the proposed distribution and any previous distributions to with-profits policyholders over a period of at least the last five years are consistent with treating with-profits policyholders fairly and any other obligations of the firm under COBS 20.

  2. (2)

    When calculating the amounts distributed in COBS 20.2.19A R and COBS 20.2.19B R:

    1. (a)

      any amount allocated to with-profits policyholders in anticipation of a distribution is treated as included in the next distribution;

    2. (b)

      the amount of any available distributable profits is treated as reduced by any part of it which the firm has decided to carry forward unappropriated; and

    3. (c)

      risk margin associated with technical provisions should be excluded.

  3. (3)

    A firm which is not a Solvency II firm is required to comply with IPRU(INS) 3.3.

COBS 20.2.20 R RP

If, on a distribution, a firm incurs a tax liability on a transfer to shareholders, it must not attribute that tax liability to a with-profits fund, unless:

  1. (1)

    the firm can show that attributing the tax liability to that with-profits fund is consistent with its established practice;

  2. (2)

    that established practice is explained in the firm's PPFM; and

  3. (3)

    that liability is not charged to asset shares.

Requirement relating to distribution of an excess surplus

COBS 20.2.21 R RP

At least once a year (or, in the case of a non-directive friendly society, at least once in every three years) and whenever a firm is seeking to make a reattribution of its inherited estate,2 a firm'sgoverning body must determine whether the firm'swith-profits fund, or any of the firm'swith-profits fund, has an excess surplus.

COBS 20.2.22 E RP
  1. (1)

    If a with-profits fund has an excess surplus, and to retain that surplus would be a breach of Principle 6 (Customers' interests), the firm should make a distribution from that with-profits fund.2

    2
  2. (2)

    Compliance with (1) may be relied on as tending to establish compliance with Principle 6 (Customers' interests).

  3. (3)

    Contravention of (1) may be relied on as tending to establish a contravention of Principle 6 (Customers' interests).

Charges to a with-profits fund

COBS 20.2.23 R RP

A firm must only charge costs to a with-profits fund1 which have been, or will be, incurred in operating the with-profits fund. This may include a fair proportion of overheads.

1
COBS 20.2.24 R RP

Subject to COBS 20.2.25 R, COBS 20.2.25A R and COBS 20.2.25B R, a1firm must not pay compensation or redress from a with-profits fund.

1 1
COBS 20.2.25 R RP

A proprietary1firm may pay compensation or redress due to a policyholder, or former policyholder, from assets attributable to shareholders, whether or not they are held within a long-term insurance fund or with-profits fund, as relevant.51

1
COBS 20.2.25A R RP

A mutual may pay compensation or redress due to a policyholder, or formerpolicyholder, from a with-profits fund, but may only pay from assets that would otherwise be attributable to asset shares if, in the reasonable opinion of the firm'sgoverning body, the compensation or redress cannot be paid from any other assets in the with-profits fund.

1
COBS 20.2.25B R RP

A payment or transfer of liabilities made to correct an error and which has the effect of restoring a policyholder, or former policyholder, and the with-profits fund to the position they would have been in if the error had not occurred (a “rectification payment”), is not a payment of compensation or redress for the purposes of COBS 20.2.24 R.

1
COBS 20.2.25C G RP

Rectification payments may include, for example, a payment to a policyholder or former policyholder to correct an erroneous underpayment of policy proceeds, or a reimbursement of premiums overpaid. The effect of COBS 20.2.25B R is that a firm may make rectification payments using assets in a with-profits fund.

1
COBS 20.2.25D G RP

COBS TP 2.14 R has the effect that payments of compensation and redress arising out of events which took place before 31 July 2009 are subject to COBS 20.2.23 R to COBS 20.2.25 R as in force at 30 July 2009.

1
COBS 20.2.26 R RP

A proprietary firm must not charge to a with-profits fund any amounts paid or payable to a skilled person in connection with a report under section 166 of the Act (Reports by skilled persons) if the report indicates that the firm has, or may have, materially failed to satisfy its obligations under the regulatory system1.

1
COBS 20.2.26A R RP

5A proprietary firm must not charge to a with-profits fund any financial penalty imposed on the firm by the appropriate regulator.

Tax charge to a with-profits fund

COBS 20.2.27 R RP

A firm must not charge a contribution to corporation tax to a with-profits fund, if that contribution exceeds the notional corporation tax liability that would be charged to that with-profits fund if it were assessed to tax as a separate body corporate.

New business

COBS 20.2.28 R RP

A firm must not effect new contracts of insurance in an existing with-profits fund unless:2

2
  1. (1)

    the firm'sgoverning body is satisfied, so far as it reasonably can be, and can demonstrate, having regard to the analysis in (2), that the terms on which each type of contract is to be effected are likely to have no adverse effect on the interests of the with-profits policyholders whose policies are written into that fund; and2

  2. (2)

    the firm has:

    1. (a)

      carried out or obtained appropriate analysis, based on relevant evidence and proportionate to the risks involved, as to the likely impact on with-profits policyholders, having regard to relevant factors including:

      1. (i)

        the volumes of each type of contract that the firm expects to be effected; and

      2. (ii)

        the periods over which the contracts are expected to remain in force; and

    2. (b)

      provided the analysis referred to in (a) to its with-profits committee or, if applicable, its with-profits advisory arrangement and to its governing body for the purposes of (1).2

COBS 20.2.28A G RP
  1. (1)

    2Writing new insurance business into a with-profits fund is not, of itself, automatically adverse to the interests of with-profits policyholders. For example, new insurance business which defers the emergence or distribution of surplus to a limited extent for a number of policyholders, or which leads to a marginal change in the equity backing ratio, may, subject to satisfying the guidance in COBS 20.2.60 G and COBS 20.2.29 G, reasonably be considered not to have an adverse effect on the with-profits policyholders in a with-profits fund, if the firm'sgoverning body is satisfied (and can demonstrate based on appropriate analysis) that each new line of insurance business is likely to be financially self-supporting over the periods during which the contracts are expected to remain in force and is likely to add sufficient value to the with-profits fund to offset the cost of acquiring the business.3

  2. (2)

    Conversely, if the particular line of new insurance business is priced on loss-making terms or the terms are such that the new insurance business is not likely to generate sufficient value after covering all the costs associated with it (in either case when considered in aggregate over the periods over which the contracts are expected to remain in force), then in the FCA's view, the terms of that insurance business are likely to have an adverse impact on with-profits policyholders interests in the relevant fund.

  3. (3)

    Firms will need to ensure that they comply with COBS 20.2.28 R at all times, but in practice firms will be expected to pay particular attention when they are designing and pricing or re-pricing products, when they are preparing their financial plans that take into account their expected costs and levels of new business, and, in particular, when reviewing their financial performance, if that reveals that costs or levels of new business have varied significantly from those expected previously.

  4. (4)

    New business for the purposes of COBS 20.2.28 R will not, in general, include increments on existing policies or business written as a result of the exercise of options by an existing policyholder.

COBS 20.2.29 G RP

In some circumstances, it may be difficult or impossible for a firm to mitigate the risk of an2 adverse effect on its existing, or new, with-profits policyholders, unless it establishes a new bonus series or with-profits fund. Circumstances that might cause a firm to establish a new bonus series or with-profits fund include:

2
  1. (1)

    where the firm has a high level of guarantees or options in its existing with-profits policies, which might place an excessive burden on new with-profits policies, or vice versa; and

  2. (2)

    where the potential risks are likely to be so great that a single with-profits fund cannot provide adequately for the interests of new and existing policyholders, even after allowing for any beneficial effects of diversification. Such potential risks are likely to arise from significant differences in the terms and conditions of the new and existing with-profits policies, including the basis on which charges are levied and reviewed.

COBS 20.2.30 G RP
2
  1. (1)

    When a firm prices the new insurance business that it proposes to effect in an existing with-profits fund, it should estimate the volume of new insurance business that it is likely to effect and then build in adequate margins that will allow it to recover any acquisition costs to be charged to the with-profits fund.2

  2. (2)

    COBS 20.2.28 R requires firms to obtain appropriate analysis and evidence and this should include at least a profitability analysis on a marginal cost basis.2

COBS 20.2.31 G RP

When a firm sets a target volume for new insurance business in an existing with-profits fund, it should pay particular attention to the risk of disadvantage to existing with-profits policyholders. Those policyholders might be disadvantaged, for example, by the need to retain additional capital to support a rapid growth in new business, when that capital might have been distributed in the ordinary course of the firm's existing business.

Relationship of a with-profits fund with the firm and any connected persons

COBS 20.2.32 R RP

Unless COBS 20.2.32A R applies, a5firm carrying on with-profits business must not:

5
  1. (1)

    make a loan to a connected person using assets in a with-profits fund; or

  2. (2)

    give a guarantee to, or for the benefit of, a connected person, where the guarantee will be backed using assets in a with-profits fund;

unless that loan or guarantee:

  1. (3)

    will be on commercial terms;

  2. (4)

    will, in the reasonable opinion of the firm's senior management, be beneficial to the with-profits policyholders in the relevant with-profits fund; and

  3. (5)

    will not, in the reasonable opinion of the firm's senior management, expose those policyholders to undue credit or group risk.

COBS 20.2.32A R RP

5 COBS 20.2.32R (1) does not apply to a Solvency II firm.

COBS 20.2.32B G RP

5Loans to a connected person using assets in a with-profits fund should be considered as investments of assets within the with-profits fund. As such, a Solvency II firm will need to ensure that:

  1. (1)

    such loans comply with the PRA Rulebook: Solvency II Firms: Investments having regard to COBS 20.2.35B G; and

  2. (2)

    where there is a conflict of interests, in the reasonable opinion of the firm's senior management, they are in the best interests of the with-profits policyholders in the relevant with-profits fund.

Contingent loans and other forms of support for the with-profits fund

COBS 20.2.33 G RP
  1. (1)

    If a firm, or a connected person, provides support to a with-profits fund (for example, by a contingent loan), no reliance should be placed on that support when the firm assesses the with-profits fund's financial position unless there are clear and unambiguous criteria governing any repayment obligations to the support provider.

  2. (2)

    The degree of reliance placed on that support should depend on the subordination of the support to the fair treatment of with-profits policyholders and clarification of what fair treatment means in various circumstances. For a realistic basis life firm this would normally be evidenced by the liability for such support being capable, under stress, of a progressively lower valuation in the future policy-related liabilities.

COBS 20.2.34 G RP

Where assets from outside a with-profits fund are made available to support that fund (and there is no ambiguity in the criteria governing any repayment obligations to the support provider), a firm should manage the fund disregarding the liability to repay those assets, at least in so far as that is necessary for its policyholders to be treated fairly.

Support arrangements

COBS 20.2.34A R RP
  1. (1)

    5A Solvency II firm must ensure that, in relation to any arrangements where assets outside a with-profits fund provide or may provide support to it, both the following requirements are met:

    1. (a)

      the precise terms and conditions on which those support asset arrangements operate and assets may become available, including whether and when they are repayable:

      1. (i)

        are adequately documented in the firm's records; and

      2. (ii)

        if the firm is required to produce a PPFM, are set out clearly and unambiguously in its PPFM.6

    2. (b)

      the operation of those support asset arrangements is consistent with terms and conditions in communications to with-profits policyholders, including any PPFM.6

Other rules and guidance on the conduct of with-profits business2

COBS 20.2.35 G RP

When a firm, other than a Solvency II firm,5 determines its investment strategy, and the acceptable level of risk within that strategy, it should take into account:

  1. (1)

    the extent of the guarantee in its with-profits policies;

  2. (2)

    any representation that it has made to its with-profits policyholders;

  3. (3)

    its established practice; and

  4. (4)

    the amount of capital support available.

COBS 20.2.35B G RP
  1. (1)

    5A Solvency II firm is required to consider its investment strategy in relation to the assets in a with-profits fund, including any strategic investments, in accordance with the PRA Rulebook: Solvency II Firms: Investments. Firms are expected, in applying the PRA Rulebook: Solvency II Firms: Investments, to take into account the particular circumstances and requirements of the liabilities in the with-profits fund to which those assets relate. For example, a Solvency II firm will need to consider:

    1. (a)

      whether a strategic investment meets the criteria in the PRA Rulebook: Solvency II Firms: Investments; and

    2. (b)

      that the investment will ensure the quality, security, liquidity of the portfolio of assets of the firm as a whole and that the investment(s) are localised to ensure their availability.

  2. (2)

    Where there is a conflict of interest (e.g. between the with-profits policyholders and the firm) the firm must ensure that the strategic investment is made in the best interests of policyholders. It is expected that a Solvency II firm applying the provisions in PRA Rulebook Solvency II Firms Investments in this manner will lead to with-profits policyholders being treated no less fairly than if the firm was not a Solvency II firm and was subject to COBS 20.2.35 G and COBS 20.2.36 R.

COBS 20.2.36 R RP

A firm, other than a Solvency II firm,5 must not:2

  1. (1)

    use with-profits assets to finance the purchase of a strategic investment, directly or by or through a connected person; or2

  2. (2)

    retain an investment referred to in (1);2

unless its governing body is satisfied, so far as it reasonably can be, and can demonstrate, that the purchase or retention is likely to have no adverse effect on the interests of its with-profits policyholders whose policies are written into the relevant fund.2

2
COBS 20.2.36A R RP

2A firm must keep adequate records setting out the strategic purpose for which a strategic investment has been purchased or retained.

COBS 20.2.36B G RP
  1. (1)

    2In order for a firm to comply with COBS 20.2.36 R, a firm'sgoverning body should consider:

    1. (a)

      the size of the investment in relation to the with-profits fund;

    2. (b)

      the expected rate of return on the investment;

    3. (c)

      the risks associated with the investment, including, but not limited to, liquidity risk, the capital needs of the acquired business or investment and the difficulty of establishing fair value (if any);

    4. (d)

      any costs that would result from divestment;

    5. (e)

      whether the with-profits actuary would regard the investment as having no adverse effect on the interests of with-profits policyholders as a class;

    6. (f)

      in the case of a proprietary firm, whether it would be more appropriate for the investment to be made using assets other than those in the with-profits fund; and

    7. (g)

      any other relevant material factors.

  2. (2)

    A firm should consider whether making or retaining a strategic investment5 should be disclosed to with-profits policyholders.

    55
  3. (3)

    Examples of strategic investments include, but are not limited to, a significant investment in another business or significant real estate assets used within the business of the firm.

COBS 20.2.37 G RP

If a firm carries out non-profit insurance business in a with-profits fund, it should review the profitability of the non-profit insurance business regularly.

COBS 20.2.38 G RP

If a firm has reinsured its with-profits insurance business into another insurance undertaking, it should take reasonable steps to discharge its responsibilities to its with-profits policyholders, in respect of the reinsured business. Those steps should include maintaining adequate controls.

Significant changes in with-profits funds2

COBS 20.2.39 R RP

A firm must not enter into a material transaction relating to a with-profits fund unless, in the reasonable opinion of the firm'sgoverning body, the transaction is unlikely to have a material adverse effect on the interests of that fund's existing with-profits policyholders.

COBS 20.2.40 R RP

A material transaction includes a series of related non-material transactions which, if taken together, are material.

COBS 20.2.41 G

Examples of material transactions include:

  1. (1)

    a significant bulk outwards reinsurance contract;

  2. (2)

    inwards reinsurance of with-profits business from another insurance undertaking;

  3. (3)

    a financial engineering transaction that would materially change the profile of any surplus expected to emerge on the with-profits fund's existing insurance business; and

  4. (4)

    a significant restructuring of the with-profits fund, especially if it involves the creation of new sub-funds.

COBS 20.2.41A R RP

2A firm must contact the FCA as soon as is reasonably practicable to make arrangements to discuss what actions may be required to ensure the fair treatment of with-profits policyholders if, in relation to any with-profits fund it operates:

  1. (1)

    the firm reasonably expects, or if earlier, there has been, a sustained and substantial fall in either the volume of new non-profit insurance contracts, or in the volume of new with-profits policies (effected other than by reinsurance), or in both, effected into the with-profits fund; or

  2. (2)

    the firm cedes by way of reinsurance most or all of the new with-profits policies which it continues to effect.

COBS 20.2.41B G RP
  1. (1)

    2The aim of the discussions in COBS 20.2.41A R is to:

    1. (a)

      allow the FCA to comment on the adequacy of the firm's planning; and

    2. (b)

      seek agreement with the firm on any other appropriate actions to ensure with-profits policyholders are treated fairly.

  2. (2)

    If the firm is no longer effecting a material volume of new with-profits policies (other than by reinsurance) into a with-profits fund; or if it is ceding by way of reinsurance most or all of the new with-profits policies which it continues to effect, then it may also be appropriate to consider whether, in the particular circumstances of the firm, it should be regarded as ceasing to effect new contracts of insurance for the purposes of COBS 20.2.54R (3).

  3. (3)

    In the discussions the FCA will have with regard to COBS 20.2.28 R (New business), if the volumes of new business are expected to be profitable and, in relation to non-profit insurance business, it is demonstrated that a fair distribution to with-profits policyholders out of the fund can be achieved and the economic value of any expected future profits is likely to be available for distribution during the lifetime of the with-profits business for the purposes of COBS 20.2.60 G, then, in the FCA's view, it is likely to be reasonable for a firm to be satisfied that there will be no adverse effect for with-profits policyholders, and accordingly that such business may continue to be written.

Process for reattribution of inherited estates: Policyholder advocate: appointment and role

COBS 20.2.42 R RP

A firm that is seeking to make a reattribution of its inherited estate must:

  1. (1)

    first discuss with the FCA7 (as part of its determination under COBS 20.2.21 R):2

    27
    1. (a)

      its projections for capital required to support existing business, which must include an assessment of:2

      1. (i)

        the firm's future risk appetite for the with-profits fund and other relevant business; and2

      2. (ii)

        how much of the margin for prudence can be identified as excessive and removed from the projected capital requirements; and2

    2. (b)

      its projections for capital required to support future new business, which must include an assessment of:2

      1. (i)

        new business volumes;2

      2. (ii)

        product terms; and2

      3. (iii)

        pricing margins;2

  2. (2)

    following the discussions referred to in (1), identify at the earliest appropriate point a policyholder advocate, who is free from any conflicts of interest that may be, or may appear to be, detrimental to the interests of policyholders, to negotiate with the firm on behalf of relevant with-profits policyholders and 2seek the approval of the FCA7 for the appointment of the policyholder advocate as soon as he is identified, or appoint a policyholder advocate nominated by the FCA7 if its approval is not granted; and

    77
  3. (3)

    involve the policyholder advocate designate at the earliest possible opportunity to enable him to participate effectively in the negotiations about the proposals for the reattribution.

COBS 20.2.43 G RP

The firm should include an independent element in the policyholder advocate selection process, which may 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 FCA will have regard to the extent to which the firm has involved others in the selection process.

COBS 20.2.44 G RP

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 a view to agreeing,2 with the FCA the precise role of the policyholder advocate in a particular case (COBS 20.2.45 R). However, the role of the policyholder advocate should include:

  1. (1)

    negotiating with the firm, on behalf of the relevant with-profits policyholders, 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 (or groups of) with-profits policyholders and the form of those benefits;

    2. (b)

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

    3. (c)

      the terms and conditions of the proposals (to the extent that they materially affect the benefits to be offered, or 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 firm'swith-profits actuary 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.

Process for reattribution of inherited estates: Policyholder advocate: terms of appointment

COBS 20.2.45 R RP

A firm must:

  1. (1)

    notify the FCA of the terms on which it proposes to appoint a policyholder advocate (whether or not the candidate was nominated by the FCA); and

  2. (2)

    ensure that the terms of appointment for the policyholder advocate:

    1. (a)

      include a description of the role of the policyholder advocate as agreed with the FCA under COBS 20.2.44 G;2

    2. (aA)

      stress the independent nature of the policyholder advocate's appointment and function, and are consistent with it;2

    3. (b)

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

    4. (c)

      set out arrangements for communications between the policyholder advocate and policyholders;

    5. (d)

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

    6. (e)

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

      2
    7. (f)

      allow the policyholder advocate to communicate freely and in confidence with the FCA;2

    8. (g)

      require the policyholder advocate to communicate with policyholders:2

      1. (i)

        as soon as is practicable after his appointment, having regard to (h)(i) and (iii); and2

      2. (ii)

        thereafter no less frequently than every six months for the duration of the policyholder advocate's appointment; and2

    9. (h)

      require the policyholder advocate:2

      1. (i)

        to make reasonable endeavours to agree with the firm the contents of any proposed policyholder communications;2

      2. (ii)

        to allow sufficient time for the process in (i) in order to meet any timescales in (g); and2

      3. (iii)

        to provide copies of the final draft of the intended policyholder communications, whether or not agreement has been reached in accordance with (i) above, both to the firm and to the FCA at least seven days in advance of the date on which the policyholder advocate intends to make the communications.2

COBS 20.2.46 G RP

A firm may include, within the policyholder advocate's terms of appointment, 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 included, it should not include protection against any liability arising from acts of bad faith.

Process for reattribution of inherited estates: Reattribution expert

COBS 20.2.47 R RP

Where a firm is not otherwise required to appoint an independent expert, it must:

  1. (1)

    appoint a reattribution expert to undertake an objective assessment of its reattribution proposals, who must be:

    1. (a)

      nominated or approved by the appropriate regulator before he is appointed; and

    2. (b)

      free from any conflicts of interest that may, or may appear to, undermine his independence or the quality of his report;

  2. (2)

    ensure that the reattribution expert's terms of appointment allow him to communicate freely and in confidence with the appropriate regulator; and

  3. (3)

    require the reattribution expert to prepare a report which must be available to the appropriate regulator, the policyholder advocate and the court (if it is relevant to any court proceedings).

COBS 20.2.48 G RP

A reattribution expert's report should comply with the applicable rules on expert evidence. The scope and content of the report should be substantially similar to that of the report required of an independent expert under SUP 18.2 (Insurance business transfers), as if (where appropriate) a reference to:

  1. (1)

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

  2. (2)

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

  3. (3)

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

Process for reattribution of inherited estates: Information to policyholders

COBS 20.2.49 R RP

A firm must ensure that every policyholder that may be affected by the proposed reattribution is sent appropriate and timely information about:

  1. (1)

    the reattribution process, including the role of the policyholder advocate, the independent expert or reattribution expert, as the case may be, and other individuals appointed to perform particular functions;

  2. (2)

    the reattribution proposals and how they affect the relevant policyholders, including an explanation 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)

    the policyholder advocate's views on the reattribution proposals and any benefits the relevant policyholders are likely to receive and the rights and interests that they are likely to be asked to give up; and

  4. (4)

    the outcome of the negotiations between the firm and the policyholder advocate about the benefits that will be offered to relevant with-profits policyholders, in exchange for the rights and interests that they will be asked to give up.

COBS 20.2.50 R RP

An adequate summary of the report by the reattribution expert must be made available to every policyholder that may be affected by the proposed reattribution.

Process for reattribution of inherited estates: Consent of policyholders

COBS 20.2.51 R RP

A firm must give relevant with-profits policyholders the option to:

  1. (1)

    individually accept or reject the final proposals for the reattribution; or

  2. (2)

    (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.

Process for reattribution of inherited estates: Costs

COBS 20.2.52 G RP
  1. (1)

    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.

  2. (2)

    Shareholders should pay a reasonable proportion of the policyholder advocate's costs.

  3. (3)

    If a reattribution proposal is not successful, the FCA 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.

Ceasing to effect new contracts of insurance in a with-profits fund

COBS 20.2.53 R RP

A firm must:

  1. (1)

    inform the appropriate regulator and its with-profits policyholders within 28 days; and

  2. (2)

    submit a run-off plan to the appropriate regulator as soon as reasonably practicable and, in any event, within three months;

of first ceasing to effect new contracts of insurance in a with-profits fund.

COBS 20.2.54 R RP

A firm will be taken to have ceased to effect new contracts of insurance in a with-profits fund:

  1. (1)

    when any decision by the governing body to cease to effect new contracts of insurance takes effect; or

  2. (2)

    where no such decision is made, when the firm is no longer:

    1. (a)

      actively seeking to effect new contracts of insurance in that fund; or

    2. (b)

      effecting new contracts of insurance in that fund, except by increment; or2

  3. (3)

    if the firm:2

    1. (a)
      1. (i)

        is no longer effecting a material volume of with-profits policies (other than by reinsurance), into the with-profits fund; or2

      2. (ii)

        is ceding by way of reinsurance most or all of the new with-profits policies which it continues to effect; and2

    2. (b)

      cannot demonstrate that it will treat with-profits policyholders fairly if it does not cease to effect new contracts of insurance.2

COBS 20.2.55 G RP

2For the purposes of COBS 20.2.54R (3) the FCA will have regard to, amongst other things, the factors set out in COBS 20.2.41BG (3).

COBS 20.2.56 R RP

The run-off plan required by COBS 20.2.53 R2 must:

2
  1. (1)

    include an up-to-date plan to2 demonstrate how the firm will ensure a fair distribution of the closed with-profits fund, and its inherited estate (if any); and

  2. (2)

    be approved by the firm'sgoverning body.

COBS 20.2.57 G RP
  1. (1)

    A firm should also include the information described in Appendix 2.15 (Run-off plans for closed with-profits funds) of the Supervision manual in its run-off plan.2

  2. (2)

    A firm should periodically review and update its run-off plan and submit updated versions to the FCA when requested to do so.2

2
COBS 20.2.58 G RP

When a firm tells its with-profits policyholders that it has ceased to effect new contracts of insurance in a with-profits fund, it should also explain:

  1. (1)

    why it has done so;

  2. (2)

    what changes it has made, or proposes to make, to the fund's investment strategy (if any);

  3. (3)

    how closure may affect with-profits policyholders (including any reasonably foreseeable effect on future bonus prospects);

  4. (4)

    the options available to with-profits policyholders and an indication of the potential costs associated with the exercise of each of those options; and

  5. (5)

    any other material factors that a policyholder may reasonably need to be aware of before deciding how to respond to this information.

COBS 20.2.59 G RP

A firm may not be able to provide its with-profits policyholders with all of the information described above until it has prepared the run-off plan. In those circumstances, the firm should:

  1. (1)

    tell its with-profits policyholders that that is the case;

  2. (2)

    explain what is missing and give a time estimate for its supply; and

  3. (3)

    provide the missing information as soon as possible, and within the time estimate given.

COBS 20.2.60 G RP
  1. (1)

    If non-profit insurance business is written in a with-profits fund, a firm should take reasonable steps to ensure that the economic value of any future profits expected to emerge on the non-profit insurance business is available for distribution during the lifetime of the with-profits business.

  2. (1A)

    Where a with-profits fund contains assets which may not be readily realisable, the firm should take reasonable steps to ensure that the economic value of those assets is made available as part of a fair distribution to with-profits policyholders.2

  3. (2)

    Where it is agreed by its with-profits policyholders, and subject to meeting the requirements for effecting new contracts of insurance in an existing with-profits fund (COBS 20.2.28 R), a mutual may make alternative arrangements for continuing to carry on non-profit insurance business, and a non-directive friendly society may make alternative arrangements for continuing to carry on non-insurance related business. Where a mutual has been granted a waiver in accordance with COBS 20.2.61 G, the agreement of its with-profits policyholders to alternative arrangements for continuing to carry on non-profit insurance business may not be needed.4

COBS 20.2.61 G RP
  1. (1)

    4A mutual operating a common fund may seek to undertake an exercise to identify that part of the fund to which the mutual considers it would be fair for relevant provisions in COBS 20 not to apply.

  2. (2)

    To give regulatory effect to the identification exercise, the FCA expects that a mutual will need to apply to the FCA to modify the relevant provisions in COBS 20 and elsewhere which are dependent on the definition of the with-profits fund.

  3. (3)

    A mutual will need to demonstrate that the appropriate statutory tests in section 138A of the Act are met. The FCA expects that mutuals will need to do at least the following to allow the FCA to consider whether granting the modification would adversely affect the advancement of the FCA's consumer protection objective:

    1. (a)

      demonstrate that the exercise does not amount to a reattribution;

    2. (b)

      demonstrate that its proposals are fair to its with-profits policyholders, and other relevant policyholders, having regard to the mutual's own particular structure, origins and other relevant circumstances, and including reference to the items in (c) to (j) below;

    3. (c)

      obtain the report of an independent expert approved by, and whose terms of reference are agreed with, the FCA on the terms of the mutual's proposals and the likely impact and effects on, and fairness to, the mutual'swith-profits policyholders and other relevant policyholders. This report should consider whether the firm has sufficiently demonstrated the absence of a reattribution under (a). The FCA will consider using its powers in section 166 of the Act (Reports by skilled persons) in appropriate circumstances;

    4. (d)

      demonstrate that the mutual'swith-profits policyholders and other policyholders are appropriately engaged and informed about the proposals;

    5. (e)

      demonstrate that it has complied with the relevant requirements in the mutual's constitutional documents, for example that members are appropriately involved in agreeing to any proposals;

    6. (f)

      demonstrate that the mutual has a convincing and robust business case for continuing in business, as opposed to run-off;

    7. (g)

      demonstrate how, and the extent to which, continuing membership rights will benefit with-profits policyholders and other policyholders;

    8. (h)

      explain the nature and terms of any continuing support to be provided to the with-profits fund from outside the with-profits fund;

    9. (i)

      demonstrate that with-profits policyholders under the mutual's proposals will not be at a disadvantage compared to equivalent with-profits policyholders in a proprietary with-profits fund; and

    10. (j)

      explain how it proposes to pay any compensation or redress that is, or may become, due to a policyholder, or former policyholder.

  4. (4)

    For the purposes of (3)(a) and (c), where the issues to be considered by the independent expert include the extent or value (in the particular circumstances of the mutual) of the rights and interests of with-profits policyholders in the with-profits fund, the FCA expects the independent expert's terms of reference to require them to take into account other available analyses of such rights and interests which may be more favourable to policyholders than the mutual's own analysis. The FCA considers that any uncertainty in the extent or value of such rights and interests in the case of a particular mutual may mean that the independent expert will need to obtain their own independent legal advice on the issue. In the FCA's view the fact of any uncertainty as to the extent or value of the relevant rights and interests, following receipt of independent legal advice, may itself be taken into account by the independent expert when producing their report. The FCA will consider on a case by case basis what further information it may provide to the expert and/or independent legal adviser to ensure that the rights and interests of policyholders have been appropriately taken into account.

  5. (5)

    The FCA expects to consult and/or seek information or advice from the PRA in accordance with section 3D of the Act and the Memorandum of Understanding between the FCA and the PRA required by section 3E. As part of any such process the FCA expects that the PRA will wish to consider, among other things, that balance sheet safety and soundness issues have been identified and addressed appropriately.

COBS 20.3 Principles and Practices of Financial Management

Production of PPFM

COBS 20.3.1 R RP
  1. (1)

    A firm must:

    1. (a)

      establish and maintain the PPFM according to which its with-profits business is conducted (or, if appropriate, separate PPFM for each with-profits fund); and

    2. (b)

      retain a record of each version of its PPFM for five years.

  2. (2)

    A firm'swith-profits principles must:

    1. (a)

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

    2. (b)

      describe the business model it uses to meet its duties to with-profits policyholders and to respond to longer-term changes in the business and economic environment.

  3. (3)

    A firm'swith-profits practices must:

    1. (a)

      describe how a firm manages its with-profits funds and how it responds to shorter-term changes in the business and economic environment; and

    2. (b)

      be sufficiently detailed for a knowledgeable observer to understand the material risks and rewards from effecting or maintaining a with-profits policy with it.

  4. (4)

    A firm must not change its PPFM unless, in the reasonable opinion of its governing body, that change is justified to:

    1. (a)

      respond to changes in the business or economic environment; or

    2. (b)

      protect the interests of policyholders; or

    3. (c)

      change the firm'swith-profits practices better to achieve its with-profits principles.

  5. (5)

    A firm may change its PPFM if that change:

    1. (a)

      is necessary to correct an error or omission; or

    2. (b)

      would improve clarity or presentation without materially affecting the PPFM’s substance; or

    3. (c)

      is immaterial.

COBS 20.3.2 G
2

[deleted]2

COBS 20.3.3 G

[deleted]2

2

Scope and content of PPFM

COBS 20.3.4 R RP

A firm'sPPFM must cover the issues set out in the table in COBS 20.3.6 R.

COBS 20.3.5 R RP

A firm'sPPFM must cover any matter that has, or it is reasonably foreseeable may have, a significant impact on the firm's management of with-profits funds, including but not limited to:

  1. (1)

    any requirements or constraints that apply as a result of previous dealings, including previous business transfer schemes;

    3
  2. (2)

    the nature and extent of any shareholder or other3 commitment to support the with-profits fund; and3

  3. (3)

    the precise terms and conditions of support asset arrangements, as described in COBS 20.2.34A R.3

COBS 20.3.6 R RP

Table: Issues to be covered in PPFM

Subject

Issues

(1)

Amount payable under a with-profits policy

(a)

Methods used to guide determination of the amount that is appropriate to pay individual with-profits policyholders, including:

(i)

the aims of the methods and approximations used;

(ii)

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

(iii)

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

(b)

Approach to setting bonus rates.

(c)

Approach to smoothing maturity payments and surrender payments, including:

(i)

the smoothing policy applied to each type of with-profits policy;

(ii)

the limits (if any) applied to the total cost of, or excess from, smoothing; and

(iii)

any limits applied to any changes in the level of maturity payments between one period to another.

(2)

Investment strategy

Significant aspects of the firm's investment strategy for its with-profits business or, if different, any with-profits fund, including:

(a)

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

(b)

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

(c)

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

(d)

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

(3)

Business risk

The exposure of the with-profits business to business risks (new and existing), including the firm's:

(a)

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

(b)

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

(c)

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

(4)

Charges and expenses

(a)

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

(b)

The cost apportionment principles that will determine which costs are, or may be, charged to a with-profits fund and which costs are, or may be, charged to the other parts of its business of its shareholders.

(5)

Management of inherited estate

Management of any inherited estate and the uses to which the firm may put that inherited estate.

(6)

Volumes of new business and arrangements on stopping taking new business

If a firm'swith-profits fund is accepting new with-profits business, its practice for review of the limits on the quantity and type of new business and the actions that the firm would take if it ceased to take on new business of any significant amount.

(7)

Equity between the with-profits fund and any shareholders

The way in which the interests of with-profits policyholders are, or may be, affected by the interests of any shareholders of the firm.
COBS 20.3.7 G RP

The table in COBS 20.3.8 G sets out guidance on how various information relevant to some of the issues covered in a firm'sPPFM (COBS 20.3.6 R) might be split between with-profits principles and with-profits practices. This is an example of the matters a firm should address in its with-profits principles and with-profits practices and is not exhaustive. A firm should consider carefully the scope and content of its PPFM as appropriate.

COBS 20.3.8 G RP

Table: Guidance on with-profits principles and practices

Reference to PPFM issues (COBS 20.3.6R)

With-profits principles

With-profits practices

(1) Amount payable under a with-profits policy

General

(a) Circumstances under which any historical assumptions or parameters, relevant to methods used to determine the amount payable, may be changed;

General

(e) For each major class of with-profits policy, methods establishing the main assumptions or parameters that decide the output of methods that determine the amount payable;

(f) Degree of approximation allowed when assumptions or parameters are applied across generations of with-profits policyholders or across different types or classes of with-profits policies;

(g) Formality with which the methods, parameters or assumptions used are documented;

(h) Target range, or target ranges, that have been set for maturity payments;

(i) Factors likely to be regarded as relevant to address policyholders' interests or security when determining excess surplus; and

Investment return, expenses or charges and tax

(j) How investment return, expenses or charges and tax are brought into account and how the impact of those items is determined on the amount payable. In particular:

  • any distinctions made in recognising the investment return from a subset of the total assets of a with-profits fund;
  • whether expenses are apportioned between all the policies in a with-profits fund or apportioned in some other way;
  • the relationship between the liability to tax attributed to a with-profits fund and the tax that the firm imputes to determine the amount payable;
  • impact on the amount payable of any attributed liability to tax of a with-profits fund as a result of the firm making a transfer to shareholders; and
  • how any other items are brought into account.

Bonus rates

(b) General aims in setting bonus rates and the constraints to which the firm may be subject in changing economic circumstances;

(c) How the range of with-profits policies or generations of with-profits policies over which the firm believes a single bonus rate would be appropriate is determined and the circumstances under which it believes a new bonus series would be necessary; and

Bonus rates

(k) Current approach to setting bonus rates, including the weight given to recent economic experience. For final bonus rates, the description should include any distinctions made 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;

(l) Frequency at which bonus rates are re-set or expected to be re-set and the circumstances under which changes in the economic environment would cause the time between re-setting to change;

(m) Maximum amount by which annual bonuses would alter if annual bonus rates were reset;

(n) Approach to setting any interim bonus rates before the next declaration of annual bonus rates;

(o) Relationship or interaction between final bonus rates and any market value reductions, if both can apply at the same time;

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

Smoothing

(d) Statement as to whether smoothing is intended to be neutral over time.

Smoothing

(q) Any differences in approach for:

(2) Investment strategy

(a) How the types, classes or mix of assets are determined; and

(b) Strategy in respect of derivatives and other instruments.

(c) Whether and to what extent there is hypothecation of assets;

(d) Period between formal reviews of investment strategy;

(e) Approach to investment in different asset classes, and assets of different credit or liquidity quality, including assets not normally traded; and

(f) Details of any external support available to the with-profits fund and how this affects the investment strategy.

(3) Business risk

(a) Where a firm explicitly excludes business risk from a class of with-profits policies but there are residual risks, clarification where these risks such as guarantee and smoothing costs are borne; and

(b) Define where compensation costs from a business risk would be borne.

(c) Current limits which apply to the taking on of business risk; and

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

(4) Charges and expenses

(a) 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.

(b) Charges currently applied and the expenses currently apportioned to major classes of with-profits policies;

(c) 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;

(d) Circumstances under which expenses will be charged to the with-profits fund at an amount other than cost, and the reasons why; and

(e) Interval for reviewing any arrangements for out-sourced services, including those provided by connected parties, giving a broad indication of the terms for termination.

(5) Management of inherited estate

(a) Preferred size or scale of inherited estate and implications for the values of the with profits policies; and

(b) Any existing division of the inherited estate between with-profits funds; and

(c) Any constraints on the freedom to deal with the inherited estate as a result of previous dealings.

(d) How the inherited estate is used, for example, in meeting costs;

(e) Whether the investment strategy for the inherited estate differs from the rest of the with-profits fund; and

(f) Any current guidelines in place as to the size or scale of the inherited estate or as to how and over what time period the inherited estate would be managed, if it becomes too large or too small.

(6) Equity between the with-profits fund and any shareholders

(a) Arrangements for, and any changes to, profit sharing between shareholders and with-profits policyholders.

(b) Current basis on which profit between with-profits policyholders and shareholders is divided; and

(c) Whether the pricing of any policies being written, and particular policies open to new business, appear to be significantly and systematically reducing the inherited estate if the shareholder transfer is taken into account.

COBS 20.4 Communications with with-profits policyholders

Provision and publication of PPFM

COBS 20.4.1 R RP

A firm must:

  1. (1)

    on request, provide its PPFM, or the PPFM applicable to specified with-profits funds:

    1. (a)

      free of charge to its with-profits policyholders; or

    2. (b)

      for a reasonable charge to any person who is not its with-profits policyholder; and

  2. (2)

    if the firm publishes its PPFM on its website, prominently signpost its location there.

Notification of changes

COBS 20.4.2 R RP

A firm must send its with-profits policyholders who are affected by any change in its PPFM, written notice, setting out any:

  1. (1)

    proposed changes to the with-profits principles, three months in advance of the effective date; and

  2. (2)

    changes to the with-profits practices, within a reasonable time.

COBS 20.4.3 R RP

A firm need not give the notice required if the change to its PPFM:

  1. (1)

    is necessary to correct an error or omission; or

  2. (2)

    would improve clarity or presentation without materially affecting the PPFM's substance; or

  3. (3)

    is immaterial.

Requirements on EEA insurers

COBS 20.4.4 R RP

In relation to any with-profits policyholder where the state of the commitment is2 the United Kingdom, an EEA insurer must:

2
  1. (1)

    provide the information necessary to enable that policyholder properly to understand the insurer's commitment under the policy;

    2
  2. (2)

    ensure that the information provided is not narrower in scope or less detailed in content than the information required to be provided in the PPFM produced by a firm subject to COBS 20.3;2 and

    2
  3. (3)

    send the policyholder who is affected by any information being changed written notice, setting out:

    1. (a)

      any proposed changes to information that is equivalent to the with-profits principles, three months in advance of the effective date; and

    2. (b)

      any changes to information that is equivalent to the with-profits practices, within a reasonable time.

COBS 20.4.5 R

[deleted]3

COBS 20.4.6 G

[deleted]3

Annual report to with-profits policyholders

COBS 20.4.7 R RP

A firm must produce an annual report to its with-profits policyholders, which must:

  1. (1)

    state whether, throughout the financial year to which the report relates, the firm believes it has complied with its obligations relating to its PPFM and setting out its reasons for that belief;

  2. (2)

    address all significant relevant issues, including the way in which the firm has:

    1. (a)

      exercised, or failed to exercise, any discretion that it has in the conduct of its with-profits business; and

    2. (b)

      addressed any competing or conflicting rights, interests or expectations of its policyholders (or groups of policyholders) and, if applicable, shareholders (or groups of shareholders), including the competing interests of different classes and generations.

COBS 20.4.8 G RP

The following documents should be annexed to the annual report in this section:

  1. (1)

    the report to with-profits policyholders made by a with-profits actuary in respect of each financial year (see SUP 4.3.16AR(4)); and

  2. (2)

    any statement or report provided by the person or committee who provides the independent judgement under the firm's governance arrangements for its with-profits business.

COBS 20.4.9 G RP

In preparing the annual report to with-profits policyholders, a firm should take advice from a with-profits actuary.

COBS 20.4.10 G RP

A firm should make the annual report available to with-profits policyholders within six months of the end of the financial year to which it relates. A firm should notify its with-profits policyholders in any annual statements how copies of the report can be obtained.

COBS 20.5 With-profits governance

Requirement to appoint a with-profits committee or advisory arrangement

COBS 20.5.1 R RP

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'sgoverning 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 20.5.2 G RP
  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'sgoverning 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'sgoverning 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 20.5.3 R RP

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'sgoverning 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'sgoverning 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'swith-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 20.5.4 G RP
  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 20.5.5 R RP

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 20.5.6 G RP
  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 20.5.7 G RP
  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'sgoverning 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 20.5.8 G RP

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'swith-profits business; and

  2. (2)

    include the approval of the firm'sPPFM by its governing body.