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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 FSA 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)

    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) apply only in so far as responsibility for the matter in question has not been reserved to the firm'sHome State regulator by a European Community instrument;

  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 who are habitually resident in the United Kingdom (COBS 20.4.4 R) and the rule on production and provision of a CFPPFM (COBS 20.4.5 R) apply, but the rest of COBS 20.4 (Communications with with-profits policyholders) does not; and

  4. (4)

    the rule on production and provision of a CFPPFM (COBS 20.4.5 R) applies as if a reference to a firm was a reference to an EEA insurer in relation to any of its with-profits policyholders who are habitually resident in the United Kingdom.

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); and

  2. (2)

    COBS 20.4 (Communications with with-profits policyholders).

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 20.2 Treating with-profits policyholders fairly

Introduction

COBS 20.2.1 G RP

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. The rules in this section address specific situations where the risk may be particularly acute. However, a firm should give careful consideration to any aspect of its operating practice that has a bearing on the interests of its with-profits policyholders to ensure that it does not lead to an undisclosed, or unfair, benefit to shareholders.

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)

      applying the methods in INSPRU 1.3.119 R to INSPRU 1.3.123 R;

    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 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, significantly less than the assumed value of the assets on which the face value of the units of the policy has been based; or

  2. (2)

    there has been, or there is expected to be, a high volume of surrenders, relative to the liquidity of the relevant with-profits fund; and the market value reduction is no greater than is necessary to reflect the impact of (1) or (2) on the relevant surrender payment.

Conditions relevant to distributions

COBS 20.2.17 R RP

A firm must:

  1. (1)

    not make a distribution from a with-profits fund, unless the whole of the cost of that distribution can be met without eliminating the regulatory surplus in that with-profits fund;

  2. (2)

    ensure that the amount distributed to policyholders from a with-profits fund is not less than the required percentage of the total amount distributed; and

  3. (3)

    if it adjusts the amounts distributed to policyholders, apply a proportionate adjustment to amounts distributed to shareholders, so that the distribution to policyholders will not be less than the required percentage.

COBS 20.2.18 R RP

A realistic basis life firm 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 of the realistic value of assets over the realistic value of liabilities in that with-profits fund.

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.

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), 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:

    1. (a)

      make a distribution from that with-profits fund; or

    2. (b)

      carry out a reattribution.

  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.1

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

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

If a firm proposes to effect new contracts of insurance in an existing with-profits fund, it must only do so on terms that are, in the reasonable opinion of the firm'sgoverning body, unlikely to have a material adverse effect on the interests of its existing with-profits policyholders.

COBS 20.2.29 G RP

In some circumstances, it may be difficult or impossible for a firm to mitigate the risk of a material 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:

  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

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.

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

A firm carrying on with-profits business must not:

  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.

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.

Other guidance on the conduct of with-profit business

COBS 20.2.35 G RP

When a firm 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 20.2.36 R RP

If a proprietary firm is considering using with-profits assets to finance the purchase of another business, directly or by or through a connected person, or if a firm is considering whether it should retain such an investment, it should consider whether the purchase or retention would be, or will remain, fair to its with-profits policyholders. When a firm makes that assessment it should consider whether it would be more appropriate for the investment to be made using assets other than those in a with-profits fund.

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.

Major changes in with-profits funds

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.

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)

    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;

  2. (2)

    seek the approval of the FSA for the appointment of the policyholder advocate as soon as he is identified, or appoint a policyholder advocate nominated by the FSA if its approval is not granted; and

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

  2. (2)

    ensure that the terms of appointment for the policyholder advocate:

    1. (a)

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

    2. (b)

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

    3. (c)

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

    4. (d)

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

    5. (e)

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

    6. (f)

      allow the policyholder advocate to communicate freely and in confidence with the FSA.

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 FSA 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 FSA; and

  3. (3)

    require the reattribution expert to prepare a report which must be available to the FSA, 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 FSA 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 FSA and its with-profits policyholders within 28 days; and

  2. (2)

    submit a run-off plan to the FSA 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.

COBS 20.2.55 G RP

A firm must contact the FSA to discuss whether it has, or should be taken to have, ceased to effect new contracts of insurance if:

  1. (1)

    it is no longer effecting a material volume of new with-profits policies in a particular with-profits fund, other than by reinsurance; or

  2. (2)

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

COBS 20.2.56 R RP

The run-off plan required by this section must:

  1. (1)

    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

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.

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. (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.

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.

Governance arrangements for with-profits business

COBS 20.3.2 G

In complying with the rule on systems and controls in relation to compliance, financial crime and money laundering (SYSC 3.2.6 R or SYSC 6.1.1 R),1 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 and complexity of the firm'swith-profits business;

  2. (2)

    include the approval of the firm'sPPFM by its governing body; and

  3. (3)

    involve some independent judgment in assessing compliance with its PPFM and addressing conflicting rights and interests of policyholders and, if applicable, shareholders, which may include but is not confined to:

    1. (a)

      establishing a with-profits committee;

    2. (b)

      asking an independent person with appropriate skills and experience to report on these matters to the governing body or to any with-profits committee; or

    3. (c)

      for small firms, asking one or more non-executive members of the governing body to report to the governing body on these matters.

COBS 20.3.3 G

If a person or committee who provides the independent judgement wishes to make a statement or report to with-profits policyholders, in addition to any annual report made by a firm to those policyholders, a firm should facilitate this.

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; and

  2. (2)

    the nature and extent of any shareholder commitment to support the with-profits fund.

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 who is habitually resident in the United Kingdom, an EEA insurer must:

  1. (1)

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

  2. (2)

    ensure that the information provided is not narrower in scope or less detailed in content than the equivalent PPFM; and

  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.

Consumer-friendly PPFM

COBS 20.4.5 R

A firm must:

  1. (1)

    produce a CFPPFM describing the most important information set out under each of the headings in its PPFM and keep it up to date as the PPFM changes over time;

  2. (2)

    express its CFPPFM in clear and plain language that can be easily understood by a with-profits policyholder, or potential with-profits policyholder who does not possess any specialist or technical knowledge;

  3. (3)

    provide its CFPPFM free of charge with any:

    1. (a)

      written notice sent to with-profits policyholders on proposed changes to its with-profits principles (where the firm must provide the version of the CFPPFM in use before the changes if this has not already been provided);

    2. (b)

      annual statements sent to its with-profits policyholders (unless there has been no material change in the CFPPFM since it was last supplied); and

    3. (c)

      key features document for1 a with-profits policy; and

  4. (4)

    make its CFPPFM publicly available and prominently signpost the availability on its website.

COBS 20.4.6 G

A firm may include the information set out in its CFPPFM in any other document it produces.

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.