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“Mirror, mirror on the wall, who is the fairest of them all?" In April 2019 The Financial Conduct Authority (FCA) published a report on the key findings from its thematic review into the fair treatment of with-profits customers.
The review was based on a sample of eight firms representing approximately 80% of the total with-profits assets and constituting a mixture of funds that are both closed and open to new business, mutual and proprietary firms, and funds and firms of varying sizes.
The FCA focused on a few key areas of with-profits management that could lead to customer harm, including investment strategy and management, capital management and governance of with-profits business.
Some of the key findings are listed below.
- Most of the firms assessed are taking reasonable care to manage the risk of customer harm in their with-profits business. Investment strategy and management and overall governance are areas that received particular praise.
- The FCA identified a few areas that firms need to do more on, or that might lead to customer harm, for example:
- Firms need to do more to use their run-off plans (ROPs) fully as intended and described in the FCA’s rules and guidance - in particular, many firms were not keeping their ROPs up to date and not using them as living documents in their day-to-day management of with-profits funds;
- Weaknesses in assessments for, and distribution of, excess surplus in funds – just because your distribution approach aims to distribute the entire estate, it doesn’t mean that you don’t need to assess the excess surplus annually;
- Insufficiently robust fund-level capital management approaches, for example, absence of clear fund-level risk appetites or similar processes and practices.
- In a small number of these cases, there were signs that firms were not complying with FCA rules for their with-profits business, such as failing to notify or consult the FCA on its intention to re-attribute the with-profits fund, contrary to the fund’s Principles and Practices of Financial Management (PPFM).
- In most cases, there was no evidence of actual customer harm having arisen. However, the FCA is concerned that customer harm may occur in the future if these or similar practices continue. The FCA expects firms to be able to clearly demonstrate that their actions were fair to different groups of with-profits customers.
- A key cause of poor practice was a failure of governance. In particular, the FCA identified ineffective oversight and challenge by senior individuals and the Board.
The full report can be accessed via the FCA’s website.
Although the review is not intended to address the wicked question of “who is the fairest of all,” the FCA published an extensive list of examples of good and poor practice that they encountered in the review within the report. The FCA expects with-profits firms to use this review to improve how they work, regardless of size or structure. The FCA expects all with-profits firms to consider the findings and examples of good and poor practice and assess whether they need to make any changes to their management of with-profits business.
Whist some examples of the good practice may be seen as common sense, others, such as scenario analysis in ROPs, monitoring of estate distribution, and assessments of excess surplus to name just a few, do require careful consideration. Firms should not under-estimate the potential technical complexity in such exercises.