The FSA's role
Regulating how insurers run their with-profits funds
As the UK’s financial services watchdog, we set standards that firms offering financial products in the UK must meet when dealing with you as a customer. For more information see our printed guide About the Financial Services Authority – which you can download or order at Publications.
All insurance companies, including with-profits companies, have to follow our Principles for Businesses. They set out the high-level standards we expect from firms. They include that firms must treat their customers fairly and manage conflicts of interest fairly, such as between itself and its customers and between different groups of customers.
One of our key objectives in regulating with-profits is to ensure the firm has a sensible plan for running the fund. This includes plans for resolving entitlements and fairness questions, and any shareholder/policyholder conflicts, while maintaining adequate financial resources. We are not involved in the day-to-day running of insurance companies and, in particular, we do not dictate the investment approach that firms follow.
Some of the things we require insurers to do
Produce a publicly available document that describes how they run their with-profits business.
This is called the Principles and Practices of Financial Management (PPFM) document and it includes key information, such as:
- how policy payouts are determined, including smoothing, bonuses and market value reductions (MVRs);
- the investment strategy; and
- charges and expenses.
The PPFM helps policyholders, their advisers and market commentators understand how an insurer runs their with-profits business. This is important because the amount of money you receive from your policy can be heavily influenced by how the insurer manages its with-profits business.
The PPFM can be a long and detailed document, so we also ask insurers to produce a consumer friendly version which summaries the key information in a way that is clear and easy to understand. This is often called 'a guide to with-profits' and is available from your insurer free of charge if you are a with-profits policyholder, or you can usually find them on your insurer's website.
Appoint a with-profits actuary to be responsible for reporting publicly whether the insurer has taken a proper account of policyholders' interest.
Every year, all with-profits insurers must report to policyholders on whether they have run their with-profits business in the way they set out in their PPFM. They must also appoint a with-profits actuary who reports publicly on whether the insurer's report, and any discretion insurers have used in making decisions, may be viewed as having taken policyholders' interests into account. With-profits actuaries must be approved by us.
Provide independent input into the process of with-profits fund governance.
The purpose of our guidance is to make sure there are safeguards in place for with-profits policyholders. In response some insurers have set up with-profits committees. Their role is to independently assess an insurer's compliance with its PPFM and how it has handled conflicts of interest between different groups of policyholders and, if relevant, between policyholders and shareholders.
Follow our rules and guidance on what it means to treat with-profits policyholders fairly.
They cover the determination of payouts, charges, terms for new business and surrender values – including restricting market value reductions (MVRs) to the amount that may be needed to avoid paying policyholders more than their fair share of the fund. This prevents insurers using an MVR as an unspecified penalty for which there is no clear justification.
Appoint a policyholder advocate to represent policyholders in a reattribution.
One of the key requirements of our rules and guidance is that insurers proposing a reattribution must appoint a policyholder advocate to negotiate on behalf of policyholders. For more information on reattributions and policyholder advocates see Reattribution.
Funds that close to new business must notify both us and policyholders promptly.
They must also inform policyholders of the options available to them and provide us with a plan for running down the fund. For more information on closed with-profit funds see Closed with-profits funds.
Tell us about proposed 'management actions'.
In certain circumstances a firm might decide to take a 'management action', for example, cutting payouts or charging policyholders for the cost of guarantees. We review firms' proposed management actions and would object if we thought they may lead to policyholders not being treated fairly.
To find out more see With-profits review, on our corporate website.
More information
Look in your policy documents or your insurer's guide to with-profits. Your insurer should also be able to answer factual questions about your policy, but it may not be able to advise you what to do.
If you are unsure what to do you should speak to a financial adviser – see Getting financial advice.