COBS 19.5 1Independent governance committees (IGCs) and publication and disclosure of costs and charges4

This section applies to:3

1. (1)

   a firm which operates a relevant scheme in which there are at least two relevant policyholders; or3

2. (2)

   a firm which offers or has decided to offer a pathway investment.3

3In this section:

1. (1)

   “drawdown fund” means either a capped drawdown pension fund or a flexi-access drawdown pension fund;

2. (2)

   “offer” means where a firm (F1) makes a pathway investment available for investment in the drawdown fund which F1 operates, where the pathway investment is either:

   1. (a)

      manufactured by F1; or

   2. (b)

      manufactured by another firm (F2);

3. (3)

   “pathway firm” means a firm which offers a pathway investment;

4. (4)

   “pathway investor” means a retail client investing in a firm’s pathway investment;

5. (5)

   “referring” means a firm which arranges for a retail client to invest in a pathway investment available through a transfer to the drawdown fund operated by another firm (F2), where F2 offers its own manufactured pathway investment;

6. (6)

   “stewardship” relates to a firm’s exercise of rights or engagement activities in relation to the investments attributable to the firm’s relevant policyholders or pathway investors, and may include:

   1. (a)

      the exercise of a firm’s voting rights in those investments; and

   2. (b)

      monitoring and engaging on matters such as strategy, performance, risk, culture and governance of the investments;

7. (7)

   “IGC’s remit of review” means the remit of the IGC as described in COBS 19.5.5R(2), COBS 19.5.5R(2A), COBS 19.5.5R(2B), COBS 19.5.5R(2C), and, where applicable COBS 19.5.5R(2D) and COBS 19.5.5R(2E).

4In this section “administration charges” and “transaction costs” have the same meaning as in COBS 19.8.1R.

A firm (Firm A) must establish an IGC, unless:3

1. (1)

   Firm A has established a governance advisory arrangement in accordance with COBS 19.5.3R; or3

2. (2)

   another firm in Firm A’s group has already established an IGC under this section, and Firm A has made arrangements with that IGC to cover a relevant scheme operated by Firm A or a pathway investment offered by Firm A.3

1. (1)

   If a firm considers it appropriate, it may establish a governance advisory arrangement instead of an IGC, having regard to:3

   1. (a)

      for a relevant scheme operator, the size, complexity and nature of the relevant scheme it operates; or3

   2. (b)

      for a pathway firm, the size of the take up, or expected size of the take up, complexity and nature of the pathway investment.3

2. (2)

   If a firm has decided to establish a governance advisory arrangement rather than an IGC, this section (other than COBS 19.5.9R (2), COBS 19.5.9R (3), COBS 19.5.10 G, COBS 19.5.11 R and COBS 19.5.12 G) apply to the firm by reading references to the IGC as references to the governance advisory arrangement.

3. (3)

   A firm must establish a governance advisory arrangement on terms that secure the independence of the governance advisory arrangement and its Chair from the firm.

A firm must include, as a minimum, the following requirements in its terms of reference for an IGC:

1. (1)

   the IGC will act solely in the interests of:3

   1. (a)

      relevant policyholders and any other members or clients a firm asks the IGC to consider; or3

   2. (b)

      pathway investors;3

2. (2)

   the IGC will assess the ongoing value for money for relevant policyholders delivered by a relevant scheme3 particularly, though not exclusively, through assessing:

   1. (a)

      whether default investment strategies within those schemes:

      1. (i)

         are designed and executed in the interests of relevant policyholders;

      2. (ii)

         have clear statements of aims and objectives;

   2. (b)

      whether the characteristics and net performance of investment strategies are regularly reviewed by the firm to ensure alignment with the interests of relevant policyholders and that the firm takes action to make any necessary changes;

   3. (c)

      whether core scheme financial transactions are processed promptly and accurately;

   4. (d)

      the levels of charges borne by relevant policyholders; 3

   5. (e)

      the direct and indirect costs incurred as a result of managing and investing, and activities in connection with the managing and investing of, the pension savings of relevant policyholders, including transaction costs; and3

   6. (f)

      whether the communications to relevant policyholders are fit for purpose and properly take into account the relevant policyholders’ characteristics, needs and objectives;3

3. (2A)

   the IGC will assess the ongoing value for money for pathway investors delivered by a pathway investment particularly, though not exclusively, through assessing:3

   1. (a)

      whether the pathway investment offered by the firm:3

      1. (i)

         is designed and managed in the interests of pathway investors; and3

      2. (ii)

         has a clear statement of aims and objectives;3

   2. (b)

      whether the characteristics and net performance of the pathway investment are regularly reviewed by the firm to ensure alignment with the interests of pathway investors and that the firm takes action to make any necessary changes;3

   3. (c)

      whether core financial transactions are processed promptly and accurately;3

   4. (d)

      the levels of charges borne by pathway investors;3

   5. (e)

      the direct and indirect costs incurred as a result of managing and investing, and activities in connection with the managing and investing of, the drawdown fund of pathway investors, including transaction costs; and3

   6. (f)

      whether the communications to pathway investors are fit for purpose and properly take into account the pathway investors’ characteristics, needs and objectives;3

4. (2B)

   where a firm has an investment strategy or makes investment decisions which could have a material impact on the relevant policyholders’ or pathway investors’ investment returns, the IGC will consider and report on:3

   1. (a)

      the adequacy and quality of the firm’s policy (if any) in relation to ESG financial considerations;3

   2. (b)

      the adequacy and quality of the firm’s policy (if any) in relation to non-financial matters; and 3

   3. (c)

      how the considerations or matters in (a) and (b) are taken into account in the firm’s investment strategy or investment decision making; and3

   4. (d)

      the adequacy and quality of the firm’s policy (if any) in relation to stewardship;3

5. (2C)

   where the firm does not have a policy in relation to ESG financial considerations, non-financial matters or stewardship, the IGC will in each case consider and report on the firm’s reasons for not having a policy;3

6. (2D)

   where the firm has not already adequately taken into account, in its investment strategy or investment decision making, other financial considerations that pose a particular and significant risk of financial harm to the relevant policyholders or pathway investors, the IGC will also:3

   1. (a)

      consider and report on the adequacy and quality of the firm’s policy (if any) in relation to those other financial considerations, and whether and how those considerations are taken into account in the firm’s investment strategy or investment decision; or3

   2. (b)

      consider and report on the firm’s reasons for not having a policy in relation to those considerations;3

7. (2E)

   the IGC will consider and report on the extent to which the firm has implemented its stated policies in relation to the considerations and matters in (2B), (2C), and, where applicable (2D);3

8. (3)

   in relation to the IGC’s remit of review,3 the IGC will raise with the firm's governing body any concerns it may have:3

   1. (a)

      in relation to any of the matters it has assessed or considered; or3

   2. (b)

      where the IGC is unable to obtain or has difficulties obtaining from the firm the information it requires;3

9. (3A)

   once a decision has been made by a firm to offer a pathway investment, the IGC must raise any concerns under (3):3

   1. (a)

      in good time to give the firm’s governing body a proper opportunity to consider and address the IGC’s concerns, before the pathway investment is offered to retail clients; and3

   2. (b)

      on an ongoing basis in relation to the pathway investment it offers;3

10. (4)

    the IGC will escalate concerns as appropriate where the firm has not, in the IGC's opinion, addressed those concerns satisfactorily or at all;

11. (5)

    the IGC will meet, or otherwise make decisions to discharge its duties, using a quorum of at least three members, with the majority of the quorum being independent;

12. (6)

    the Chair of the IGC will be responsible for the production of an annual report setting out:

    1. (a)

       the IGC's opinion on:3

       1. (i)

          the value for money delivered by a relevant scheme or a pathway investment, particularly against the matters listed under (2) or (2A); and3

       2. (ii)

          the adequacy and quality of the firm’s policies, or reasons for not having policies, in relation to the considerations and matters listed under (2B), (2C) and (if applicable) (2D); 3

    2. (aa)

       the extent to which the firm has implemented its stated policies in relation to the consideration and matters in (2B), (2C) and (if applicable) (2D);3

    3. (b)

       how the IGC has considered relevant policyholders' or pathway investors’3 interests;

    4. (c)

       any concerns raised by the IGC with the firm's governing body and the response received to those concerns;

    5. (d)

       how the IGC has sufficient expertise, experience and independence to act in relevant policyholders' or pathway investors’3 interests;

    6. (e)

       how each independent member of the IGC, together with confirmation that the IGC considers these members to be independent, has taken into account COBS 19.5.12 G;

    7. (f)

       the arrangements put in place by the firm to ensure that the views of relevant policyholders or pathway investors’3 are directly represented to the IGC; and4

    8. (g)

       4administration charges and transaction costs information complying with the requirements in COBS 19.5.16R;

13. (7)

    4the Chair of the IGC will ensure the annual report is produced by 31 July each year, in respect of the previous calendar year;

14. (8)

    4the IGC will ensure the publication of administration charges and transaction costs information complying with the requirements in COBS 19.5.13R;

15. (9)

    4the IGC will ensure that all members of each relevant scheme are provided with an annual communication complying with the requirements in COBS 19.5.17R;

16. (10)

    4the IGC will make available the annual communication referred to in (9), on request, to:

    1. (a)

       relevant scheme members’ spouses or civil partners; and

    2. (b)

       persons within the application of the relevant scheme and qualifying or prospectively qualifying for benefits under the relevant scheme; and

17. (11)

    4the IGC will ensure that information is communicated under this rule in a manner that pays due regard to the purposes for which relevant policyholders might reasonably use the information.

A firm must:

1. (1)

   take reasonable steps to ensure that the IGC acts and continues to act in accordance with its terms of reference;

2. (2)

   take reasonable steps to provide the IGC with all information reasonably requested by the IGC in good time3 for the purposes of carrying out its role;

3. (3)

   provide the IGC with sufficient resources as are reasonably necessary to allow it to carry out its role independently;

4. (4)

   have arrangements to ensure that the views of relevant policyholders or pathway investors3 can be directly represented to the IGC;

5. (5)

   take reasonable steps to address any concerns raised by the IGC under its terms of reference;

6. (5A)

   for any pathway investment, take reasonable steps to address any concerns raised by the IGC about the matters in COBS 19.5.5R(3) and (3A):3

   1. (a)

      before the firm offers the pathway investment, and3

   2. (b)

      promptly, for any pathway investment it already offers.3

7. (6)

   provide written reasons to the IGC as to why it has decided to depart in any material way from any advice or recommendations made by the IGC to address any concerns it has raised;

8. (7)

   take all necessary steps to facilitate the escalation of concerns by the IGC under COBS 19.5.5R (4) and COBS 19.5.6G (5); 4

9. (8)

   make available the IGC’s terms of reference and the three most recent annual reports, in a way appearing to the firm to be best calculated to bring them to the attention of relevant policyholders and their employers or to the attention of pathway investors3; and

   4
10. (9)

    4provide each relevant scheme’s IGC with administration charges and transaction costs information, setting out the costs and charges for each default arrangement and each alternative fund option that the member is able to select.

1. (1)

   A firm must take reasonable steps to ensure that the IGC has sufficient collective expertise and experience to be able to make judgements on the matters in the IGC’s remit of review3.

2. (2)

   A firm must recruit independent IGC members through an open and transparent recruitment process.

3. (3)

   A firm must appoint members to the IGC so that:

   1. (a)

      the IGC consists of at least five members, including an independent Chair and a majority of independent members;

   2. (b)

      IGC members are bound by appropriate contracts which reflect the terms of reference in COBS 19.5.5 R, and on such terms as to secure the independence of independent members;

   3. (c)

      independent IGC members who are individuals are appointed for fixed terms of no longer than five years, with a cumulative maximum duration of ten years;

   4. (d)

      individuals acting as the representative of an independent corporate member are appointed to the IGC for a maximum duration of ten years;

   5. (e)

      independent IGC members who are individuals, including those representing independent corporate members, are not eligible for reappointment to the IGC until five years have elapsed, after having served on the firm's IGC for the maximum duration of ten years;

   6. (f)

      appointments to the IGC are managed to maintain continuity in terms of expertise and experience of the IGC.

The firm, in appointing independent IGC members, must determine whether such a member is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, that member’s judgement.

4The administration charges and transactions costs information referred to in COBS 19.5.5R(8) must, in relation to each relevant scheme:

1. (1)

   be published by 31 July each year, in respect of the previous calendar year;

2. (2)

   be available for free on a publicly accessible website;

3. (3)

   include the costs and charges for each default arrangement and each alternative fund option that a member is able to select; and

4. (4)

   include an illustration of the compounding effect of the administration charges and transaction costs, based on either the assumptions contained in COBS 13 Annex 2 or those in Version 4.2 of the Actuarial Standard Technical Memorandum (AS TM1) produced by the Financial Reporting Council, for a representative range of fund options that a member is able to select.

4Regarding transaction costs:

1. (1)

   the requirements in COBS 19.5.13R(3) and COBS 19.5.16R(1) apply to the extent that such information is available to the IGC; and

2. (2)

   the published information should include a warning giving brief details of any unavailable information that the IGC is aware of.

4The administration charges and transaction costs information in the IGC’s annual report referred to in COBS 19.5.5R(6)(g) must, in relation to each relevant scheme:

1. (1)

   at a minimum, include the costs and charges for each default arrangement;

2. (2)

   explain how a relevant scheme member can access the costs and charges information for each default arrangement and each alternative fund option that a member is able to select, including providing a link to the website required by COBS 19.5.13R(2); and

3. (3)

   be published alongside any information in the IGC’s annual report relating to the relevant scheme’s default investment strategy and value for members.

4The annual communication referred to in COBS 19.5.5R(9) must:

1. (1)

   include a brief description of the most recent transaction costs and administration charges information that has been published in accordance with COBS 19.5.13R, and an explanation of how that information is relevant to the relevant scheme member; and

2. (2)

   explain how a relevant scheme member can access the information referred to in (1), including providing a link to the website required by COBS 19.5.13R(2).