The process for reattribution of inherited estates

A with-profits fund contains assets belonging to the firm which it will use to meet its realistic liabilities to with-profits policyholders. To protect policyholders, our rules restrict what the firm can do with the assets in the fund. The 'inherited estate' is part of the with-profits fund. Generally, it is that part of the with-profits fund over and above the part required to meet realistic liabilities that the firm nevertheless retains for commercial reasons. For example, to ensure it has a strong capital base or to fund future growth plans. The inherited estate provides working capital for the with-profits fund in the longer term and supports its operation. In most with-profits firms, the inherited estate has built up over many years. It is usually made up of previous and current policyholders' premiums and investment returns, or past injections of capital from shareholders.

Even though the inherited estate is an asset belonging to the firm (just like all the other assets in the with-profits fund), the firm is not free to dispose of it as it likes. Our rules (just like the rules of previous regulators) recognise that policyholders have rights and interests in the assets that make up the inherited estate. But our rules also recognise that a firm is free to negotiate with its policyholders to give up some of those rights in return for a payment. A reattribution is the result of that process of negotiation; it gives effect to the agreed rights and interests in the inherited estate and the payment to policyholders. When a reattribution is proposed, the value of what the policyholders are being asked to give up is usually related to the value of what they might have expected to receive from a distribution of the estate if there had been no reattribution.

A firm might opt for a reattribution for a number of reasons. For example, it might decide to merge several different with-profits funds into one fund in order to reduce management costs. That might only be practical if something can be done to restructure the estate. To achieve that, a firm might propose buying out the rights policyholders have over the inherited estate (i.e. a reattribution).

There is a process for firms to follow and this is set out in the FSA rules and guidance at COBS 20.2.42R - 20.2.52G. These provisions aim to ensure that:

• taking account of the circumstances in which the firm finds itself, the reattribution is within the range of reasonable outcomes available to the firm and takes due account of policyholders' interests and treats policyholders fairly;
• policyholders are treated fairly during the reattribution process;
• there is someone completely independent of the FSA (the policyholder advocate) representing policyholders' interests during the process; and
• the process itself is open and transparent.

Broadly, when undertaking a reattribution, a firm must:

• identify and appoint a policyholder advocate (PHA) to negotiate (on behalf of eligible with-profits policyholders) the benefits to be offered to eligible with-profits policyholders in exchange for the rights and interests they are being asked to give up. The PHA must be approved or nominated by the FSA;
• notify us of the PHA's terms of appointment;
• in some cases, and depending on the legal process used, also appoint a reattribution expert to objectively assess the reattribution proposals and prepare a report for the benefit of a Court;
• send appropriate and timely information to every policyholder that might be affected by the proposed reattribution; and
• give eligible policyholders the option to accept or reject the proposals or vote on whether the proposals should go ahead.

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Our rules are designed to ensure that firms proposing a reattribution comply with our Principles for Business. For example, the firm must act with integrity, have due regard to their policyholders' interests, ensure that their policyholders have adequate information and avoid conflicts of interest. Our rules are also designed to achieve the outcome that policyholders are treated fairly during the reattribution process and as a result of the reattribution.

But we recognise that firms have different circumstances and may adopt different legal procedures to achieve a reattribution. For example, some firms may give effect to a reattribution using the transfer of business procedures in Part VII of the Financial Services and Markets Act 2000 (FSMA). Other firms may use the procedures in section 425 of the Companies Act 1985. In each case the Court will have a role in deciding whether it is appropriate for the reattribution to go ahead. Our rules are flexible to accommodate the Court's role.

Firms may also apply for a modification of our rules so that they work effectively in the firm's particular circumstances. In deciding whether to modify the rules we will consider, amongst other things, whether the modification would pose an undue risk to policyholders or to the outcomes our rules are designed to achieve.

In brief, our role is to scrutinise the firm's reattribution proposals, to assess their fairness for policyholders and the long-term implications for the firm and to support the negotiations between the firm and the PHA, so that those negotiations are effective and achieve the best available outcome for both parties. As a result, we:

• oversee the reattribution process;
• approve the PHA. Alternatively, we can nominate a PHA if we consider this to be in policyholders' interests, for example, if the reattribution, or any part of it, is likely to be very complex or controversial;
• consider the PHA's proposed terms of reference carefully before he/she is appointed. We may raise objections to any part of them;
• nominate or approve the reattribution expert where one is needed; and
• provide advice, support and views to both parties when we think this will support the negotiations between the PHA and the firm.

We expect firms to discuss their intentions to make a reattribution of their inherited estate with us before beginning the process.

Under section 45 of FSMA, we also have the power to impose a requirement on a firm if we consider this is necessary to protect the interests of policyholders. For example, we may vary or impose a requirement on the firm's authorisation in order to protect the interests of policyholders. This is explained further in SUP 7.2. We may also require the firm to modify its reattribution proposals or, if necessary, we could prevent the firm from carrying out all or part of them.

We are not a direct party in the negotiation as our main concern is that the negotiating parties (the policyholder advocate and the firms, all of whom have legal and other professional advisers including actuaries or accountants) are able to conduct a full and fair negotiation. So, we are not on either side of the negotiation. We recognise however that the negotiation may be assisted if we are ready (on request from the parties, or on our own initiative) to consider stating our position or expressing our views on any appropriate aspect at any point in the process. As a result, we aim to play a role that will enable us to oversee the process, assist this where appropriate and ultimately to assist the Court, whilst throughout remaining ready to exercise our regulatory powers wherever necessary.

Some issues, especially issues of law, that may arise between the negotiating parties may, by their nature, be issues most suitably addressed and decided by the Court (for example, the determination of, among other things, the various rights and interests in the estate). In relation to such an issue, we are likely to confine ourselves to assisting the Court where it is asked to address and decide such an issue.

The specific approach we aim to take is as follows.

1. If the parties agree that the negotiation would be assisted by us stating a position or expressing a view on a particular question that they have, between them, identified, we will consider doing so unless we believe it would be inappropriate to do so, or inappropriate to do so at that stage.
2. If any of the parties wish to raise a question with us but the other party does not agree, we will still consider whether it is appropriate to state a position or express a view at that stage, taking account of any reasons given by the parties as to why (as the case may be) we should or should not. The question should ordinarily be shared with all other parties to the negotiation, and the same will usually apply to our response.
3. We reserve the right to state a position or express a view at any stage, before, during or after the negotiation, on our own initiative and unprompted by a question from one or more of the parties. Ordinarily we will inform the parties in advance that we intend to state a position or express a view, but we reserve the right to do either without informing the parties in advance.
4. We may require the parties to provide information, address issues, or give responses, at any stage, before, during or after the negotiation.
5. In relation to an issue of law, we are likely to confine ourselves to assisting the Court when the Court is asked to address and decide the issue. We may take a similar approach on other issues if there is a suitable forum for, or means by which to achieve, their resolution.
6. We will examine any proposal to policyholders that results from the negotiation. When doing so, factors we will consider include the fact that it is a negotiated proposal, any particular features of the negotiation and whether the proposal falls within a fair range.
7. We will prepare a report to the Court on the proposal and on any other aspect we think should be drawn to the Court's attention, and will answer any questions the Court may wish to raise about it. We may, subject to the Court, also wish to address the Court through legal advisers.
8. We will examine the way the proposal is put to policyholders, and (as appropriate) to shareholders, and will consider material points raised by policyholders and shareholders in response.
9. We will also take any action we consider appropriate in the event that we are concerned on any issue falling within our regulatory domain, including the fair treatment of (all) policyholders and the long term stability of the with-profits fund.

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We expect the PHA to be a person rather than, say, an organisation.

The precise role of the PHA will depend on the nature of the firm and its proposed reattribution. Typically, as well as negotiating with the firm on behalf of eligible with-profits policyholders, the PHA will also advise such policyholders on issues such as the criteria the firm proposes to use to determine whether they are eligible and how the firm proposes to allocate benefits to them. The PHA will also prepare a report to policyholders on whether he/ she considers the firm's proposals are in their interests.

Given his/her role, the PHA must be free from any conflicts of interest which may be detrimental to the interests of the policyholders and must have the skills and knowledge required for the role.

The PHA is exempt from the need to be authorised under FSMA and we expect firms to make relevant policyholders aware of this. This exemption means that the PHA is completely independent of the FSA and so not subject to FSA requirements. It also means that policyholders do not have recourse to the Financial Ombudsman Service (FOS) in the event of a dispute with the PHA. However, they still have recourse to the FOS to complain about the firm in respect of the way the reattribution process has been run or about the outcome. In addition, the process itself has a number of safeguards to ensure policyholders' interests are protected. For example:

• we approve the PHA or can nominate one;
• our rules require the PHA's terms of reference to allow him/her to act independently and in the interests of policyholders; and
• we can require a firm to modify its reattribution proposals or, in some cases, can prevent the firm from carrying out all or part of them.

COBS 20.2.45R sets out the issues the PHA's terms of reference must address. In particular, these must stress the independent nature of the role and allow for the PHA to communicate freely and confidentially with us. We will also consider the PHA's skills and experience.

When discussing the terms of reference to us, we would expect any other information the firm feels would be appropriate in helping our considerations to be included, for example:

• a copy of the proposed contract with the PHA;
• details of the proposed negotiation timetable and the PHA's budget; and
• confirmation of whether the PHA is content with the proposed contract, terms of reference, plan and budget.

We will respond to the firm and may also give individual guidance if appropriate.

In most cases, the firm will nominate a PHA. We will then normally have discussions with the nominated PHA to help determine whether they are suitably qualified and experienced to act as the PHA for the proposed reattribution. As the nature of the proposed reattribution is an important factor in deciding the suitability of the PHA, the FSA cannot approve him/her until a broad outline of the reattribution has been prepared.

Once appointed, a PHA will generally be given time before the negotiations commence to select the professional advisers he/she needs, and to make preliminary enquiries about, for example, the firm, its proposals and the factual background to them.

Where reattribution cases involve an insurance business transfer under Part VII of FSMA and SUP 18, a firm must appoint an independent expert. The independent expert's role is to assess the insurance business transfer (including the reattribution proposal) objectively and then prepare a report for the Court.

If a reattribution does not involve a business transfer scheme, a firm does not have to appoint an independent expert, so it must appoint a reattribution expert instead. His/her role is broadly the same as an independent expert in that he/she must also make an objective assessment of the reattribution proposals.

However, in cases where the reattribution is simple and the expert would duplicate the functions of the PHA, we would expect firms to seek a waiver from the requirement to appoint an expert to avoid incurring unnecessary costs.

Factors a reattribution expert will consider when objectively assessing the reattribution proposals include:

• the nature and extent of any restructuring of the firm's with-profits fund;
• the benefits that will be offered to eligible with-profits policyholders in exchange for the rights and interests they are being asked to give up; and
• any other factors that we or the expert may regard as relevant.

Like the PHA and the independent expert, the reattribution expert must make a report available to us, the PHA and, where relevant, the Court. A summary must also be made available to the firm's policyholders. The report will cover issues such as the reattribution expert's opinion of the likely effect of the proposals on policyholders (or, where relevant, each group of policyholders). However, the amount of detail that it will go into will depend on the complexity of the proposals, the importance of the details themselves and the circumstances. For example, where the reattribution proposal forms part of a wider proposal for restructuring, it may not be appropriate to consider the reattribution in isolation and so the reattribution expert will need to also understand and report on the wider picture.

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Yes. The approval process here is similar to that for the appointment and approval of the PHA; the reattribution expert must be nominated or approved by the FSA, must be free from any conflicts of interest which could impact on the role and must have relevant knowledge, both practical and theoretical, and experience of the types of insurance business transacted by the firm. He/she would usually be an actuary. The general principles in SUP 5.4.8G, regarding the suitability of a skilled person, also apply to appointing a reattribution expert.

The reattribution expert's terms of engagement, like those of the PHA, must allow him/her to communicate freely and confidentially with the FSA. Firms will also need to co-operate fully with a reattribution expert including providing access to all relevant information and appropriate resources.

This depends on the circumstances of the reattribution proposal. Sometimes, a firm's announcement of the appointment of a PHA might mark the formal start of negotiations. In other cases, negotiations might not begin until some time later because, for example, information is being gathered. The PHA will also need to communicate with, and receive views from, eligible with-profits policyholders about the proposed reattribution. This process can take many months.

Each policyholder affected by the reattribution must be given timely and appropriate information about the proposals, which is clear, fair and not misleading.

As well as considering the content of the information provided, a firm should also consider the means by which this will be communicated because not all policyholders will have access to the internet. Consideration should also be given to the information needs of policyholders who will not be directly affected by the firm's proposals.

Firms do not have to disclose confidential, or commercially sensitive, information. Nor do they have to disclose information about a third party or information that is irrelevant to the reattribution proposals or arrangements.

In addition, a firm will not be treated as having failed to comply with its obligations to provide information if it has been given to policyholders by another person, such as the PHA, the independent expert or the reattribution expert. So, for example, if the PHA writes to policyholders to tell them of the outcome of negotiations, the firm will not also need to write to them.

The type of information policyholders must receive is set out in COBS 20.2.49R - 20.2.50R. A firm might also:

• explain the wider picture or the context or background to the proposals, for example, if the reattribution is linked to the restructuring of a firm;
• set out the benefits and drawbacks of its proposals for each relevant group of policyholder and for the firm if that is appropriate;
• make clear the steps in the reattribution process;
• publish a timetable for the proposed reattribution and any interdependencies;
• provide further information, for example, over the internet or through helplines; and
• issue regular updates, especially where negotiations are conducted over a long timescale.

The amount that policyholders should be offered will vary in each case and depends on the circumstances of the reattribution and the outcome of the negotiations between the firm and the PHA. Issues such as the likelihood of a distribution taking place and the economic value to shareholders of carrying out a reattribution are also relevant to a valuation of the rights and interests that policyholders are being asked to give up.

When a firm completes its negotiations, policyholders must receive information about the outcome and, if appropriate, the firm's final proposals for the reattribution.

Before, or at the same time as, inviting eligible with-profits policyholders to accept an offer, a firm will also send out details of the individual benefits to be received by each eligible with-profits policyholder in exchange for the rights or interests they are being asked to give up.

Such information might also:

• explain how the firm arrived at the final proposals; and
• set out any material changes in the information that has already been supplied.

Firms might offer policyholders the chance to individually accept or reject the proposals or might decide to follow an established legal process where policyholders can take a vote and the majority can bind the minority (with the sanction of the Court, if applicable).

Where a firm proposes an elective process and a minority do not accept the proposals in the first instance, firms might make arrangements to allow those policyholders a further opportunity to elect to be a party to the reattribution at a later date.

Normally, where a proposal is put to the vote, the voting arrangements will allow eligible with-profits policyholders the opportunity to vote by post or, if the vote is to take place at a meeting, for those policyholders to be able to appoint representatives to present their views. The closing date for votes submitted by post or, as the case may be, the time for appointing representatives should normally be at least eight weeks after the prospective deal has been announced but in some cases can be longer or shorter.

Where a firm follows a reattribution process other than that described in the FSA's rules, we consider it to be fair that affected policyholders should still be given the chance to decide whether or not to accept the firm's proposals (including a 'second chance' for those who did not opt in the first time round).

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In some cases, there might be disagreement between the firm and the PHA about the value of the benefits to be offered to with-profits policyholders in return for the rights and interests they are being asked to give up. In such circumstances, firms might make an offer to policyholders highlighting the disagreement, and the reasons for the PHA's disagreement, so the policyholders can make an informed decision.

Notifying policyholders of the final outcome of negotiations should normally be done after the Court has considered the proposed reattribution, if Court sanction is required. Firms need not necessarily write to each individual policyholder to explain the outcome of that vote. Instead, they might make the information publicly available, for example by putting a notice on their website, by giving details through a helpline, or by placing an advertisement in the national or regional press.

The treatment of costs will almost certainly affect the value of the benefits offered. Therefore, the way in which the costs of a reattribution should be met is a matter for discussion between the PHA and the firm at the start of the process.

We consider that the general costs of a reattribution, other than those of a PHA, should be met from shareholder funds unless a firm can show good reasons for presenting an alternative arrangement.

In terms of the PHA's costs (which normally include the PHA's budget and extra costs, such as the costs of professional advice and administrative and publicity costs), we consider that shareholders should pay a reasonable proportion of the PHA's costs.

We will not, however, normally seek to restrict the way in which PHA's costs are divided between shareholders and policyholders, provided that the arrangements are fair and the PHA is satisfied with them.

Examples of the types of agreement the firm and PHA might come to include:

• eligible with-profits policyholders contributing to the PHA's costs, for example by a deduction from the total value of the benefits that will become available to those policyholders;
• a budget might be proposed that will be funded entirely, or in part, from shareholder funds with any additional expenditure being met from funds attributable to eligible with-profits policyholders; or
• cost sharing might be proposed so a firm and eligible with-profits policyholders will benefit if savings are made, compared to the budget, and costs are shared if the budget is exceeded.

If the reattribution proposal does not go ahead, we would normally expect the PHA's costs to be met by the person initiating it (and if it is the firm, then any shareholders would be expected to pay).

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