Policyholder advocates
Policyholder advocates were introduced by FSA rules that took effect on 30 June 2005. Their purpose is to ensure that, where an authorised firm conducting long term with-profits insurance business proposes to redefine its policyholders' interest in the 'inherited estate' through a reattribution process1, there will be an independent figure representing policyholders' interests to the firm (and, where required, to the FSA and others).
A firm might decide to opt for a reattribution if, for example, it decides to merge several different with-profits funds into one fund in order to reduce management costs.
This briefing note sets out a simple overview of the new rules. It does not highlight all of their significant aspects, or aim to provide a comprehensive summary of them. The full rules can be found in COB 6.13 in the FSA's Handbook.
FSA's role
The FSA encourages a firm proposing a reattribution to consult with it before beginning the process. The firm does not have to obtain the FSA's prior consent to the reattribution, but it should note that the FSA may use its regulatory power under section 45 of FSMA (Financial Services and Markets Act 2000) to intervene if it believes that there is reason for it to do so. For instance, the FSA may vary or impose a requirement on the firm's authorisation in order to protect the interests of consumers or potential consumers (such as policyholders). The FSA may also require the firm to modify its reattribution proposals or, if necessary, it will prevent the firm from carrying out all or part of them.
Court's role
Some reattributions will also require the agreement of a court, because for example, they will involve a transfer of insurance business from an authorised firm to another body. The requirements for a business transfer scheme are set out primarily in Part VII of FSMA.
Policyholder Advocate
Role
The precise role of the policyholder advocate will depend on the nature of the firm and its proposed reattribution. Typically, the policyholder advocate will negotiate with the firm on behalf of the with-profits policyholders, for instance over the individual/aggregate value of the benefits the firm is offering to them in exchange for the interests they are asked to give up. The policyholder advocate will also advise policyholders on issues such as the allocation of benefits to them and the criteria used for determining their eligibility. He will also prepare a report to the policyholders on these issues.
Criteria and procedure for appointment
The firm proposing the reattribution must appoint a policyholder advocate who has either been nominated or approved by the FSA. Given his role, the FSA expects the proposed policyholder advocate to be free from any conflicts of interest which may be detrimental to the interests of the policyholders he represents. He must also have the skills and knowledge required for the role.
The firm must notify the FSA of the policyholder advocate's proposed terms of appointment. These must stress the independent nature of his role, and allow for him to communicate freely (and, at his discretion, confidentially) with the FSA.
Reattribution expert
Role
If a firm is not required to appoint an independent expert to assess its reattribution proposals (for instance, as part of a court approved insurance business transfer under Part VII of FSMA), it must then also appoint a 'reattribution expert'.
The reattribution expert's role is to consider and assess the restructuring of the firm's with-profits fund (and, if applicable, any larger restructuring of the firm which impacts on it). He must also assess the benefits the firm proposes to allocate to its with-profits policyholders in exchange for the interests they are being asked to give up, taking into account any other factors that he or the FSA believes to be material.
The reattribution expert must then prepare a report that is available to the firm, the FSA, the policyholder advocate (and, if relevant, the court). It should include his opinion of the effect of the proposals on with-profits policyholders (or, where relevant, each group of policyholders). The reattribution expert must also make an adequate summary of his report available to the firm's policyholders generally.
Criteria and procedure for appointment
The criteria for the appointment of the reattribution expert are similar to those for the policyholder advocate: he must be nominated or approved by the FSA, and he must be free from conflicts of interest which could impact on his role. He must also have relevant practical and theoretical knowledge of the firm's insurance business, and he is likely to be an actuary.
His terms of engagement, like those of the policyholder advocate, must also allow him to communicate freely (and, at his discretion, confidentially) with the FSA. Therefore, the firm must cooperate fully with the reattribution expert, and provide him with access to relevant information and staff.
Information to policyholders and the decision process
Launching the reattribution negotiations
The firm should announce its appointment of the policyholder advocate, and the announcement should also mark the launch of the proposed reattribution. The policyholder advocate will then seek the views of affected policyholders and enter into negotiations with the firm on their behalf.
Keeping policyholders informed
The firm must ensure that each affected policyholder receives timely and appropriate information about the reattribution process that is clear, fair, and not misleading. This should include information about the policyholder advocate, the reattribution expert, the wider restructuring of the firm (if any), and the benefits and drawbacks of the specific reattribution proposals. The firm does not have to provide this information to policyholders if they have already received it from another source (such as the policyholder advocate). The FSA does not require the firm to disclose irrelevant, confidential or commercially sensitive information to policyholders as part of the reattribution process.
The firm should also ensure that it has put appropriate arrangements in place for policyholders to obtain further, up to date information on the reattribution process from, say, the internet or a helpline. The firm must also consider whether or not to provide regular updates to affected policyholders. The FSA will not expect this if the reattribution negotiations are brief, but if they prove to be protracted then the firm should arrange for an update to be provided at least every six months.
Conclusion of negotiation
The firm should inform relevant policyholders when it concludes its negotiations with the policyholder advocate. It must also explain the outcome of the negotiations and its final reattribution proposals to them. In addition, the firm must provide the policyholders with a copy of the policyholder advocate's report and also, with a summary of the reattribution expert's report. If the firm decides to make an offer to policyholders that does not have the support of the policyholder advocate, it should explain why it is doing so.
Before or at same the time that it notifies policyholders about the reattribution offer that it is making, the firm should also send out details of the individual benefits to be received by each relevant policyholder.
Outcome
At the end of the process, with-profits policyholders must be given the chance to individually accept or reject the firm's proposals (or, as required, to vote in the relevant majority on whether or not the firm should go ahead with its proposals).
The firm should notify its policyholders of the final outcome of the reattribution process within a reasonable time. In doing so, it is not required to write to its policyholders individually, but it must take steps to make the information publicly available (e.g. through its website, or a helpline, or a press advert etc.).
Following another reattribution process
A firm might propose to follow a reattribution process other than that described above. For it to be seen to be fair, the FSA considers that affected policyholders should 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 in the first instance). If not, their existing rights should be protected as much as possible.
Costs
The FSA believes that the general costs of the reattribution, other than those of the policyholder advocate, should be met from shareholder funds, unless the firm can show good reasons for presenting an alternative arrangement.
However, the FSA also believes that there should be flexibility in the firm's allocation of the policyholder advocate's costs: it expects shareholders to meet a reasonable proportion of them, for the arrangement to be fair, and for the policyholder advocate to confirm that he is satisfied with it. Therefore, the specific costs of the policyholder advocate could be met solely by policyholders, or by shareholders' funds, or a mixture of the two. If the reattribution proposal is not successful, however, the FSA would normally expect the costs of the policyholder advocate to be met by the person initiating it (and if it is the firm, then the shareholders of the firm will be expected to pay).
1 When a reattribution is proposed, the value of what the policyholders are being asked to give up is the value of what they might have expected to receive from a distribution of the inherited estate. With-profits firms aim to keep their average payout to policyholders in line with average investments over the longer term. However some of these returns may not be allocated to policyholders when they are earned, and may (for example) be retained to ensure a stronger capital base. This pool of unallocated money is known as the estate and it may build up over many years. The estate, like the whole of the with-profits fund, belongs to the firm. For a fuller explanation of this see CP207 Chapter 5 which explains what a reattribution is and why a firm might want to carry one out. A fuller explanation of ownership and reattribution is contained in the first issues paper from the FSA's with-profits review.