This appendix applies to every friendly society that2 is an insurer.

The calculation of each of the base capital resources requirement, the long-term insurance capital requirement and the general insurance capital requirement is set out in PRU 2.1. The calculation of each of the "guarantee fund" and "required margin of solvency" for non-directive friendly societies is set out in chapter 4 of IPRU(FSOC).

To fulfil its obligations under the Insurance Directives, and as part of the FSA's risk-based approach to supervision, there are certain times when the FSA needs to monitor a firm more closely than it normally would. This is so the FSA can fulfil its function of supervising firms properly and meet the regulatory objective of securing an appropriate degree of protection for consumers.

The rules in this appendixrequire a firm to submit reports and information to the FSA when:

1. (1)

   a firm is failing to satisfy threshold condition 4 (Adequate resources) (see COND 2.2), and its capital resources have fallen below its required margin of solvency, or its guarantee fund; or

2. (2)

   the capital resources of a firm have fallen below its capital resources requirement; or

3. (3)

   a firm has decided to cease to effect new contracts of insurance; or

4. (4)

   a firm is going through periods of potential uncertainty, for example, when it has come under the control of a new parent undertaking or following the grant or variation of permission.

The FSA may also ask a firm to submit reports and information to it when the firm's capital resources fall below the level advised in individual capital guidance given to the firm.

In accordance with the Insurance Directives, a firm whose capital resources have fallen below its required margin of solvency, or its guarantee fund, is required, by the rule set out in this appendix, to submit a scheme of operations, together with an explanation of how its capital resources will be adequately restored. In order to secure an appropriate degree of protection for consumers, the FSA applies the rule in this appendix to firms to which the provisions of the Insurance Directives would not otherwise apply.

A firm which is entering into run-off is required to submit a scheme of operations, including an explanation of how its liabilities to policyholders will be met in full. Where the capital resources of such a firm subsequently fall below its required margin of solvency, the firm is required to submit a plan for restoration.

Following a change in control, or the grant or variation of permission, the reports submitted help the FSA to identify when a firm departs from the scheme of operations submitted as part of the notification of a change in control, or an application for the grant or variation of permission, and on which basis such notification or application was approved.

Principle 4 of the FSA's Principles for Businesses provides that firm's should hold adequate financial resources, while PRU 1.2.22 R requires a firm to maintain overall financial resources which are adequate to ensure that there is no significant risk that it cannot meet its liabilities as they fall due. In considering these requirements, a firm may decide to maintain capital resources above the level advised in individual capital guidance given by the FSA, or, if no individual capital guidance has been given, above its capital resources requirement. The amount of any such additional capital resources held is at the discretion of the firm. However, the extent to which a firm matches these additional capital resources to the volatility of its capital base, in conjunction with the strength of its systems and controls environment, is likely to affect the frequency with which it is subject to intervention under this appendix.

In relation to a firm carrying on with-profits insurance business, action which it takes either to restore its capital resources to the levels set by the intervention points in this appendix, or to prevent its capital resources falling below those points, should be consistent with Principle 6 of the FSA's Principles for Businesses. Principle 6 requires a firm to pay due regard to the interests of its customers and treat them fairly.

These rules are in addition to the other rules and guidance in SUP, in particular SUP 2 (Information gathering by the FSA on its own initiative), SUP 15 (Notifications to the FSA), SUP 16(Reporting requirements) and the Principles for Businesses (PRIN).

See SUP App 2.11.2 G for guidance on the period that the scheme of operations should cover.

See SUP App 2.11.2 G for guidance on the period that the scheme of operations should cover.

Unless any of SUP App 2.4.1 R, SUP App 2.5.1 R, SUP App 2.5.3 R or SUP App 2.6.1 R applies, if a firm's circumstances change, such that its capital resources have fallen, or are expected to fall, below the level advised in individual capital guidance given to the firm by the FSA, then, consistent with PRIN 2.1.1 RPrinciple 11 (Relations with regulators), a firm should inform the FSA of this fact as soon as practicable, explaining why capital resources have fallen, or are expected to fall, below the level advised in individual capital guidance, and:

1. (1)

   what action the firm intends to take to increase its capital resources; or

2. (2)

   what modification the firm considers should be made to the individual capital guidance which it has been given.

In the circumstance set out in SUP App 2.7.1 G, the FSA may ask a firm for alternative or more detailed proposals and plans or further assessments and analyses of capital adequacy and risks faced by the firm. The FSA will seek to agree with the firm appropriate timescales and scope for any such additional work, in light of the circumstances which have arisen.

In relation to a firm carrying on with-profits insurance business, if it intends either (a) to remedy a fall in the level of capital resources advised in its individual capital guidance, or (b) to prevent a fall in the level advised in that guidance, for example, in either case, by taking management action to de-risk a with-profits fund or by reducing non-contractual benefits for policyholders, it should explain to the FSA how such proposed actions are consistent with the firm's obligations under PRIN 2.1 Principle 6 (Customers' interests).

If a firm's capital resources fall below the level advised in individual capital guidance given to the firm and, at the same time, any one or more of SUP App 2.4.1 R, SUP App 2.5.1 R, SUP App 2.5.3 R or SUP App 2.6.1 R applies, the firm should first comply with those rules. Those rules are concerned with circumstances where capital resources are likely to have fallen to levels much lower than the level advised in individual capital guidance and are, in some cases, requirements imposed by the Insurance Directives.

If a firm has not accepted individual capital guidance given by the FSA it should, nevertheless, inform the FSA as soon as practicable if its capital resources have fallen below the level suggested by that individual capital guidance. In such circumstances, the FSA may ask the firm for further explanation as to why it does not consider the individual capital guidance to be appropriate. The FSA may also consider using its powers under section 45 of the Act to, on its own initiative, vary a firm's Part IV permission, so as to require it to hold such capital as the FSA considers is necessary for the firm to comply with PRU 1.2.22R.

SUP App 2.8.1 R only applies if a firm ceases to effecting new contracts of insurance in respect of the whole of its insurance business.

For the purposes of SUP App 2.8.1 R, a new contracts of insurance excludes contracts effected under a term in a subsisting contract of insurance. 1

Under Principle 11, the FSA normally expects to be notified by a firm when it decides to cease effecting new contracts of insurance in respect of one or more classes of contract of insurance (see SUP 15.3.8 G). At the same time, the FSA would normally expect the firm to discuss with it the need for the firm to apply to vary its permission (see SUP 6.2.6 G and SUP 6.2.7 G) and, if appropriate, to submit a scheme of operations in accordance with SUP App 2.8.1 R.

See SUP App 2.11.2 G for guidance on the period that the scheme of operations should cover.

A firm that has notified the FSA of a new parent undertaking may be requested to submit a scheme of operations (see SUP 11.5.5 G). A scheme of operations would be requested if the significance and circumstances of the change were considered to be sufficient to merit that level of scrutiny. This is normally only likely to be necessary when there has been an ultimate change in control, or when, as a result of the change in control, significant changes are proposed to the firm's regulated activities, business plan or strategy. A firm which has submitted a scheme of operations under SUP 11.5.5 G, is not required to submit a further scheme of operations under this appendix unless SUP App 2.4, SUP App 2.5 or SUP App 2.8 applies. SUP App 2.13 does, however, apply to such a firm.

The FSA may ask a firm seeking a grant or variation of permission to provide a scheme of operations as part of the application process (see AUTH 3.9.9 G (1) and SUP 6.3.25 G). Such a firm is not required to submit a further scheme of operations under this appendix unless SUP App 2.4, SUP App 2.5 or SUP App 2.8 applies. SUP App 2.13 and SUP 6 Annex 4 do, however, apply to such a firm.

A firm should discuss its plan in draft with the FSA before submitting it. If a plan is submitted which does not satisfy the FSA that the firm can restore its capital resources (as appropriate), or meet its liabilities as they fall due, the FSA may use its own-initiative power to vary or cancel the firm's permission. If a firm submitting a plan is part of a group of companies, the FSA may ask that firm to provide additional information in relation to other companies in the group, if this is necessary to establish how the firm will restore its own sound financial position. The firm should agree in discussion with the FSA the nature of such additional information.

The schemes of operations required when a firm's capital resources have fallen below its required margin of solvency or its guarantee fund (see SUP App 2.5.1 R and SUP App 2.4.1 R, respectively) should cover a period which is sufficient to demonstrate that the firm's capital resources will be adequately restored. Typically this would be a period of at least three years. However, if a scheme of operations has expired, but SUP App 2.4.1 R or SUP App 2.5.1 R continues to apply, the firm should submit a new scheme of operations. The scheme of operations required by SUP App 2.8.1 R, when a firm ceases to effect new contracts of insurance, should cover the run-off period until all liabilities to policyholders are met.

The period to be covered by, and the details to be included in, the plan for restoration required by SUP App 2.5.3 R will depend on the circumstances of the firm, why its capital resources have fallen below its required margin of solvency and the degree of risk that that fall will be repeated, even if the firm restores its capital resources in accordance with its plan.

In relation to a firm which carries on with-profits insurance business and which submits a plan, the FSA would expect an explanation of how any actions it plans to take to restore capital resources to the level of the guarantee fund, required margin of solvency or capital resources requirement are consistent with the firm's obligations under Principle 6 (Customers' interests).

The business strategy referred to at SUP App 2.12.1R (1) should include a description of the nature of the risks which the firm is underwriting, or intends to underwrite. It should also give an explanation of the firm's strategy for managing the risks associated with carrying on insurance business (including, in particular, reinsurance).

The amount of detail to be given on the firm's business strategy required by SUP App 2.12.1R (1) should be appropriate to the scale and complexity of the firm's operations and the degree of risk involved.

In relation to firms covered by this appendix, IPRU(FSOC) 4.1 sets out the rules relating to capital resources for non-directive friendly societies andPRU 2.1, 2.2 and 8.3 set out the rules relating to capital resources for every other firm. The capital resources which a firm is required to maintain vary according to whether the firm has its head office in the United Kingdom or overseas, and depending on the nature of the insurance business it carries on. The information which a firm is required to submit under SUP App 2.12.1 R should reflect the nature and content of the rules relating to capital resources identified above. For example, in order to satisfy SUP App 2.12.1 R, a firm with its head office outside the United Kingdom which is carrying on direct insurance business in the United Kingdom should submit separate information concerning its world-wide activities and its UK activities.

To reflect its obligations under PRU 2.1.10R or IPRU(FSOC) 4.1(2) (as applicable), in order to comply with SUP App 2.12.1 R, a firm which carries on both long-term insurance business and general insurance business should submit separate information for each type of insurance business.

For the purpose of SUP App 2.13.1R (1), the FSA considers that transactions with, or in respect of, associates include:

1. (1)

   contracting (as either party), advancing, repaying, writing off or agreeing to change the terms of any loan;

2. (2)

   entering into (in any capacity), releasing, calling upon or agreeing to change the terms of any guarantee, pledge, security, charge or any off-balance-sheet transaction;

3. (3)

   entering into agreements to acquire or dispose of property or which otherwise affect the nature or value of the firm's assets;

4. (4)

   making an investment (directly or indirectly) in an associate;

5. (5)

   entering into (as either party), commuting or agreeing to change the terms of, any contract of reinsurance; and

6. (6)

   entering into, or changing the terms of, any agreement to give or provide services or to share costs.

The FSA considers that a significant departure referred to in SUP App 2.13.1R (3) includes:

1. (1)

   entry or withdrawal from a line of insurance business;

2. (2)

   significant revision of the firm's strategy for managing risks, in particular the basis upon which risks are reinsured;

3. (3)

   forecast premiums being exceeded, by more than 10%, for a single financial year (or part year if the period covered by the scheme of operations is or includes part of a financial year);

4. (4)

   claims experience being significantly worse than forecast for a single financial year (or part year if the period covered by the scheme of operations is or includes part of a financial year);

5. (5)

   the actual level of capital resources being significantly worse than forecast;

6. (6)

   paid or proposed dividends being greater than those forecast; and

7. (7)

   any other transaction or circumstance which is likely to have a material effect upon available assets (as defined in IPRU(INS) 11.1).

When:

1. (1)

   the FSA has required a financial recovery plan within the meaning of article 20a of the First Non-Life Directive;

2. (2)

   the FSA is of the view that policyholders' rights are threatened because the financial position of the firm is deteriorating; and

3. (3)

   the FSA decides to require the firm to hold more capital than would otherwise be required under the Handbook to ensure that the firm will be able to fulfil the required margin of solvency in the near future;

any such higher capital requirement will be based on the financial recovery plan.

The run-off plan required by COB 6.12.94R(2) should include the information described in SUP App 2.15.2 G to SUP App 2.15.13 G in respect of the relevant with-profits fund.

A firm's run-off plan should describe how the firm proposes to manage the run-off of the with-profits fund. That description should include:

1. (1)

   details of the expected duration and costs of fully running off the fund's liabilities;

2. (2)

   an explanation as to how a solvent run-off will be funded; and

3. (3)

   details of the firm's future strategy for managing the risks associated with the run-off of the fund.

A firm's run-off plan should include an explanation of its future investment strategy, including:

1. (1)

   its strategy for matching the with-profits fund's liabilities with appropriate assets; and

2. (2)

   any changes it expects to make to the with-profits fund's investment strategy as a result of the closure of the with-profits fund, including any changes to the proportions of different types of investments.

A firm's run-off plan should include an explanation of its strategy for managing the with-profits fund's counterparty and credit risk, both within and external to the firm's group.

A firm's run-off plan should show how it will address any additional operational risks that may flow from the closure of the with-profits fund, including:

1. (1)

   any changes that it proposes to make to staffing arrangements for the run-off;

2. (2)

   an estimate of the cost of proposed operational changes, including redundancy costs; and

3. (3)

   any material outsourcing arrangements it proposes to enter into, explaining how the firm will address any specific operational risks created by those arrangements.

A firm's run-off plan should explain how it will use and manage reinsurance (if it will), including:

1. (1)

   any new inwards or outwards reinsurance it proposes to enter into as a result of the closure of the with-profits fund identifying, in each case, the proposed counterparty and the counterparty's relationship to the firm's group (if any); and

2. (2)

   how it will manage the risk that the reinsurance in (1) will not perform as expected.

A firm's run-off plan should include:

1. (1)

   details of any changes that will be made to the firm's corporate governance arrangements as a consequence of closure;

2. (2)

   an explanation of how costs charged to the with-profits fund may change in the light of closure;

3. (3)

   an explanation of any changes it will make, as a consequence of closure, to any charges for guarantees, including:

   1. (a)

      the circumstances in which those charges may be varied in the future; or

   2. (b)

      the manner by which the level of any appropriate variation to those charges may be determined;

4. (4)

   an explanation of any actual or potential changes in the maturity payment or surrender payment target ranges that the firm will apply to determine benefits under its with-profits policies;

5. (5)

   an explanation of any actual or potential changes in the firm's smoothing policy as a consequence of closure;

6. (6)

   an explanation of any changes to the firm'sprojection rates as a consequence of closure;

7. (7)

   details of any new deductions to be made from the firm's surrender payments, together with an explanation as to how those deductions are consistent with:

   1. (a)

      Principle 6 (Customers' interests); and

   2. (b)

      COB 6.12.39R to COB 6.12.45R (Amounts payable under with-profits policies: Surrender payments);

8. (8)

   if there are groups of unitised with-profits policies in the with-profits fund with similar market value reduction free dates, an explanation as to whether:

   1. (a)

      the firm expects surrenders to peak around any of those dates; and

   2. (b)

      if it does, how it proposes to deal with those peaks;

9. (9)

   details of the information that the firm gives to its with-profits policyholders about their open market options when its pension policies vest and any changes that will be made to that information as a result of the closure;

10. (10)

    details of how the firm will deal with any potential mis-selling costs that may arise in the future in respect of contracts of insurance effected in the with-profits fund;

11. (11)

    an explanation of how the firm:

    1. (a)

       anticipates capital will become available for distribution to policyholders (and shareholders where appropriate); and

    2. (b)

       will ensure a full and fair distribution of the closed with-profits fund, including any inherited estate;

    including details of:

    1. (c)

       how the firm plans to provide in the long term for annuity payments on any with-profits and non-profits policies under which benefits have vested;

    2. (d)

       how the firm will address future adverse circumstances in relation to these (e.g. increased annuitant longevity); and

    3. (e)

       details of the firm's plans for distributing the embedded value in any major subsidiaries held in or by the closed with-profits fund;

12. (12)

    an explanation of any material differences between the firm's run-off plan and relevant parts of its PPFM, together with details of any changes that will be made to the PPFM as a consequence of closure (The firm should provide the FSA with a copy of the revised sections of its PPFM when it submits its run-off plan.);

13. (13)

    an explanation of whether the firm will be seeking to expand any other business following closure of the with-profits fund. (This explanation should include whether the firm will effect any new with-profits policies in a different with-profits fund and whether it will seek to expand its unit-linked or non-profit insurance business. It should also include an explanation of how such plans will impact on the closed with-profits fund. For example, will the firm offer policyholders in the closed with-profits fund the opportunity to switch into another with-profits fund or into unit-linked business?)

A firm's run-off plan should include:

1. (1)

   a forecast summary revenue account for the with-profits fund, in the form of SUP App 2.15.9 G Table 1;

2. (2)

   a forecast summary balance sheet and statement of solvency for the with-profits fund, which has been prepared in the form of SUP App 2.15.9 G Table 2 and on a regulatory basis; and

3. (3)

   a forecast summary balance sheet and statement of solvency for the entire firm, which has been prepared in the form of SUP App 2.15.9 G Table 3 and on a regulatory basis;

in each case, for at least a three year period, beginning on the date of closure; and

1. (4)

   a description of the assumptions underlying the forecasts at (1) to (3) and the reasons for adopting those assumptions.

If a firm is a realistic basis life firm, its run-off plan should include:

1. (1)

   a realistic balance sheet and statement of solvency position in the form of SUP App 2.15.9 G Table 2, if the financial position of the relevant with-profits fund would, when stated in that form, be materially different from the firm's most recent realistic solvency submission for that fund; or

2. (2)

   a statement that the firm is satisfied that the closure of the with-profits fund will not materially affect the realistic solvency position of that fund, as reflected in the firm's most recent realistic solvency submission for that fund.

A firm's run-off plan should include:

1. (1)

   a revised individual capital assessment for the firm (see PRU 2.3), which reflects the impact of the closure of the relevant with-profits fund; or

2. (2)

   a statement that the firm is satisfied that the closure will not materially affect the firm's most recent assessment.

A firm's run-off plan should include details of any:

1. (1)

   intra-group balances held by the with-profits fund;

2. (2)

   groupcompany investments held by the with-profits fund; and

3. (3)

   guarantees given by the firm;

which, in each case, have a value in excess of 5% of the firm's gross technical provisions.

A firm's run-off plan should include any other information that the firm considers relevant to the run-off of the closed with-profits fund.

The FSA may request additional information and explanations from the firm. (See section 165 (Authority's power to require information) of the Act.)

Significant changes to, or departures from, a firm's run-off plan are likely to trigger one or more of the firm's obligations to notify the FSA. (See, for example, Principle 11 (Relations with regulators). The guidance in SUP 15.3 (General notification requirements) may also be relevant.)