COBS 20.5 With-profits governance

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

1. (1)

   appoint:

   1. (a)

      a with-profits committee; or

   2. (b)

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

2. (2)

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

3. (3)

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

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

1. (1)

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

   1. (a)

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

   2. (b)

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

   3. (c)

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

   4. (d)

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

2. (2)

   that the with-profits committee or advisory arrangement must:

   1. (a)

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

   2. (b)

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

      1. (i)

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

      2. (ii)

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

      3. (iii)

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

      4. (iv)

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

      5. (v)

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

      6. (vi)

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

      7. (vii)

         the impact of any management actions planned or implemented;

      8. (viii)

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

      9. (ix)

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

      10. (x)

          the costs incurred in operating the with-profits fund;

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.

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.