With-profits Policyholder Protection May Come at a Cost, Warns Towers Watson

Proposals from the Financial Services Authority (FSA) to amend the rules and guidance designed to improve fairness for with-profits policyholders are in principle welcome but need further consideration in some areas, according to Towers Watson, a global professional services company.

As part of its response to the FSA’s consultation paper CP11/05 entitled ‘Protecting With-profits Policyholders’, the company said that the rights of policyholders need to be considered in the context of the rights of other stakeholders in the fund such as shareholders and members. Singling out the interests of with-profits policyholders is unbalanced claims the company.

Towers Watson director, Richard Waller, said: “We think it is important that the FSA is clear regarding the application of rules and guidance where it conflicts with existing principles or practices of financial management. Firms have different ways of managing their funds and the proposals, as issued, risk overlooking arrangements that, in a lot of circumstances, are working very well for all parties.”

One area in particular where the company sees cause for concern is in the proposed treatment of fees charged to the fund by other group companies such as investment managers and service companies. Waller said: “As drafted, the proposals seem to prohibit these organisations from including reasonable loadings for risk, uncertainty and profit. Where the group company is assuming risks on behalf of the fund it should be allowed to charge a commercial price, as would be the case if the services were provided on the same basis by a third party.”

He said the company would like to see an alternative that didn’t treat intra-group service arrangements for with-profits funds differently from other commercial arrangements between two parties, with regulatory oversight to ensure the terms agreed are reasonable, such as through market benchmarking.

The other principal area of concern highlighted by Towers Watson relates to fund governance. Currently, the proposals would require companies with a large with-profits fund to have a with-profits committee made up entirely or with a majority of independent members overseeing all of its funds. However, the proposals do not stipulate the need for committee members to have particular qualifications or maintain relevant market knowledge.

Waller said: “These proposals will improve consistency across the industry but at a cost for firms that don’t currently have with-profits committees and consider their current arrangements to be perfectly adequate. The size threshold doesn’t necessarily ensure greater independent consideration is given to the most challenging issues as small funds can be complex and large funds can be more straightforward. Also, independent committees will only be as effective as the people within them and there is nothing in the proposals to ensure committee members keep on top of market developments.”

He said the company considers firms should be allowed to seek an opt-out if they believe a with-profits committee is not necessary on proportionality grounds.

The FSA is considering further its proposals in the light of consultation feedback and is expected to issue a policy statement on the subject later this year.


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