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What does the FCA’s Thematic Review on with-profits tell us?

2 June 2019

Guy Vanner, managing director, AKG, reviews the FCA’s recent paper on the fair treatment of with profits customers and looks at some of the implications.

On 25 April the FCA published its long-awaited Thematic Review (TR19/3) of the Fair Treatment of With Profits Customers. It was the first Thematic Review of the with profits market since 2010.

The key focus areas of the review (which the FCA assessed as presenting the highest potential risk of customer harm) were:

• Investment strategy and management

• Capital management in relation to areas such as estate distribution and fund resolution

• Fair allocation of risk and reward between stakeholders in capital management decisions

• Governance of with profits business, principally in relation to the above 3 areas.

The FCA reviewed information from most of the 37 active with profits firms, then conducted a detailed assessment of with profits funds within 8 firms (representing approximately 80% of with profits assets within the market and including a mix of open and closed funds across mutual and proprietary firms of varying sizes).

The key findings were:

  • Most firms assessed are taking reasonable care to manage the risk of customer harm
  • Where funds were closed to new business firms did not always use their run-off plans appropriately, as intended and described in FCA rules and guidance
  • Weaknesses were identified in assessments of and distribution of excess surplus
  • There were examples of insufficiently robust fund-level capital management approaches
  • These practices have the potential to cause customer harm if not corrected
  • In most cases there was no evidence of actual customer harm having occurred
  • In the limited instances where the FCA found practices presenting a higher risk of customer harm a key cause was failure of governance.

Feedback has been provided to all firms that participated in the review. The FCA has requested firms to take action where it has identified poor practice. The CEOs of all with profits firms have been asked to ensure that their firm takes full account of the findings. Round-table events are also planned later this year for senior managers so that the FCA can understand what actions firms are taking to address its findings.

AKG Commentary

It is clear that with profits providers are once again coming under pressure to illustrate that customers are being treated fairly, something that is equally applicable to both closed and open book business. The spotlight from this review, and the ramifications of the FCA’s wider Asset Management Market Study, will mean that the hunt for transparency of costs, terms and outcomes remains high on the agenda.

AKG’s annual series of UK Life Office With Profits Reports include extensive and systematic analysis of all significant UK with profit funds, and AKG’s With Profits Transparency Ratings will be of particular interest to advisers in this context. AKG’s latest With Profits Market Briefing is also available for download here, free of charge.

AKG’s analysis, however, can realistically only cover information which is available in the public domain. The key documents that are available are firms’ reports and accounts, SFCRs, PPFMs and Annual Reports to With Profits policyholders.

It would be more informative if there were more relevant compulsory public disclosure in respect of some of the areas that the FCA deems to ‘present the highest risk of customer harm’ (and indeed on individual with profits funds where firms manage multiple funds). Independent commentators such as AKG would then be able to form more robust opinions on some key elements of funds’ operations.

The publication of comparable information from all funds might help advisers and commentators to highlight areas of possible unfair treatment.

It is perhaps encouraging that, following the review, the FCA does not consider it necessary to propose new rules or guidance at this time although equally disappointing therefore that, so far as we know, the regulators have no plans to increase public disclosures. AKG has previously noted the rather unsatisfactory reduction in public domain disclosures in respect of with profits business since the Solvency II regime was introduced at the end of 2016.

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