The Financial Services Authority has released its fifth and final Issues Paper in its review of the ...
The Financial Services Authority has released its fifth and final Issues Paper in its review of the with-profits sector, which involves £300bn in policies, held by about 15m policy holders.
The paper – which delivers a series of ideas to improve the governance of with-profits funds – sets out five possible options aimed at tackling concerns regarding the breadth of discretion retained by insurers, the lack of transparency over the exercise of that discretion, and the potential for conflicts of interest.
The directions set out in the issue paper are:
Directors define principles and practices of financial management.
This would implement the proposals set out in the fourth Issues Paper that firms should be more transparent about the nature of their discretion and the parameters within which it will be exercised.
Policyholder representation on board.
This would give direct visibility to policyholders' interest in board discussions, however the appointment of election process to find a single individual who could represent many different classes of policyholders could be contentious and expensive.
With-profits fund committee.
The committee would have a specific responsibility to consider the interest and fair treatment of policyholders in those areas where the company has discretion, and monitor the exercise of that discretion by policyholders. This would be similar to the supervisory role on behalf of unit holders played by the trustee/depository in collective investments.
Place a statutory duty under company law on directors to have due regard to the interests of policyholders.
This option would seek to place on directors some form of general statutory duty, in addition to the obligations on firms in respect of their policyholders than already exist under the regulatory regime.
Introduction of beneficial ownership of assets.
It would theoretically be possible to create within life company groups, the beneficial ownership of assets evident in collective investment schemes, perhaps by using a corporate body similar in structure to an open ended investment scheme sitting alongside the life company.
John Tiner, FSA managing director, said governance is at the heart of many of the concerns about consumer detriment in with-profits products, as seen with the Equitable Life debacle.
He said the aspect of the operation of with-profits funds needs to be considered carefully to ensure that not only was the potential for policyholders' interests to suffer reduced, but also that any changes to the regime are proportionate to the scale of the problem.
The FSA is now asking for views on the options and responses to the fifth and final issue paper, by 12 April. The full paper is available on the publications area of the FSA website at www.fsa.gov.uk. The FSA's with-profits review was announced in February 2001.
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