FSA officials are pressing ahead with changes to the governance of with profits funds and life insur...
FSA officials are pressing ahead with changes to the governance of with profits funds and life insurance firms by the end of March 2004, despite suggestions from the insurers that it would be difficult to get consumers to understand the governance practices.
A key factor in reform of the with-profits regime is the drive for transparency of information, and a requirement on companies to define and publish their Principles and Practices of Financial Management (PPFM), says today's policy statement on with-profits governance.
However, insurers argued in their responses to CP167 - looking at with profits governance and the role of actuaries - that it would be extremely difficult to produce a single PPFM which is "adequate for governance purposes and easy to understand for policyholders" and before April 2004.
Life offices say the sheer amount of information required for the PPFM is beyond that required for governance, yet the FSA is enforcing its position by pointing out it that processes must have enough detail about the material risks and rewards of maintaining a with-profits policy, or it could be seen as a breach of Conduct of Business Rule 6.10.16R.
Part of the concern seems to be because all board directors will now be responsible for the decisions taken in relation to with-profits funds, which means any problems or lack of understanding about with-profits funds or policies will be the responsibility of directors to put right.
Along with paper changes, the FSA now requires that the with-profits actuary produce a report on the firm's compliance of PPFM, which must be sent to with-profits policyholders, and the reviewing actuary is then required to "provide a public opinion" on the governance of the fund.
Moreover, anyone who performs actuarial functions on the with-profits funds is not allowed to be a board member.
While the language might not be particularly bullish, the FSA is putting its foot down and effectively ordering that firms make the changes.
"This new governance approach is closely linked to the implementation of the proposed new reporting system for life insurers, on which we are making good progress and which will bring major regulatory and business flexibility benefits to life insurers by calibrating their solvency position more closely to policyholder liabilities and the financial risks of the firm," says John Tiner, FSA managing director for insurance.
"We have made clear that the calculation of realistic liability must be fully consistent with a life insurer's actual practice in setting bonus levels and smoothing and with how that practice is described to policyholders," he adds.
Additional consultations will be published "shortly" says the FSA to look at the proposals for audit scooping, gathering public actuarial opinion as well as discuss in detail the wording which is "designed to give firms greater clarity on what the obligation to treat customers fairly means as regards with-profits business".
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