Governance of Mutuals
Implications From The FSA’s
With-Profits Review
Graham Berville
Senior Independent Advisor
BDO LLP
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objectives, not size of the firm.
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mid-sized firms and start-ups,
as well as the FSA.
AGENDA
1. Background and context
2. FSA with profits review
3. How are mutuals performing?
4. Key areas that Boards need to consider
5. What are the impediments to good governance
6. Discussion and questions
1. BACKGROUND AND CONTEXT
• Annotated Combined Code in place.
• Some evidence of improvements – but still many ‘explains’.
• Lack of buy in to Project Chrysalis indicates FSA’s underlying attitude
to Mutual sector.
• FSA currently recruiting senior advisor from the Mutual sector.
• Solvency 2 presents significant challenges for sector.
2. FSA WITH-PROFITS REVIEW
Key
findings
1. Main areas of concern: Governance and
policyholder communication
2. Weaknesses in relation to COBS Chapter 20.
Principle 6 Customers Interests. Principle 7
Communication & Principle 8 Conflicts of
Interest.
FSA WITH PROFITS REVIEW
“The findings were particularly disappointing in
light of our previous communications to the
sector.”
“We are intervening now and taking strong
action with firms at risk of breaching our
requirements.”
(FSA June 2010)
FSA WITH PROFITS REVIEW
What is
required?
1. Appropriately skilled and knowledgeable
individuals on the Board with right
balance of independence
2. Sound Governance structures
3. The right information at the right time
FSA WITH PROFITS REVIEW
What the
FSA
expects to
see
• Governance: Policyholder interests protected and taken
into account.
• Communication: Current and potential policyholders
provided with comprehensive, timely and clear information
to allow a view on risk and reward balance of policy.
• Expenses: Costs charged to policyholders the costs
incurred in running the fund.
• New Business: Terms for writing new business do not make
existing policyholders materially worse off.
• Payouts: Fair, and policy conditions such as MVR’s applied
fairly and proportionately.
• Investments: Appropriate to the fund and do not prevent
policyholders from receiving fair payouts.
• Capital: Clearly identified in terms of ownership and used
appropriately by management.
• Asset share methodology: Robust, with clearly laid down
and agreed processes for smoothing etc.
3. HOW ARE MUTUALS PERFORMING?
Desk research based on 2009 Report and Accounts
10 Mutuals including 5 large firms
Key findings:
• Only one firm had a With Profits Committee, rest relying on With Profits
Actuary.
• One Firm had more Execs on Board than Non Execs.
• One Chairman formerly Exec Director and on Board since 1997.
• In one firm, 3 of 4 Non Execs have served for more than 9 years.
• A Chairman has served on Board since 1992.
• A Chairman is a full time employee with another organisation.
• A Chairman appointed in 2009 having served on Board since 1981.
• One firm did not detail the appointment dates of any Board members.
• 3 firms had a majority of ‘lay’ Non Execs.
• In 5 firms, majority of Board members also policyholders and members.
KEY GOVERNANCE AREAS FOR BOARDS TO CONSIDER
1. Are policyholders’ interests properly protected?
2. Is the With Profits Committee/ With Profits Actuary sufficiently
independent and challenging of executive management?
3. Do the With Profits Committee engage with policyholders to explain
decisions?
4. Do the With Profits Committee receive sufficient and the right MI?
5. Are conflicts of interest identified and managed effectively?
6. Are there gaps in the role, function and effectiveness of control
functions?
5. IMPEDIMENTS TO GOOD GOVERNANCE
• Cost (particularly for small firms)
• Complacency
• Lack of Board renewal
• Difficult for new Non Execs to
challenge the status quo
But . . .
• The penalties can be severe
• The FSA have made their position clear
• There are many examples of poor
practice in the Mutual sector
• An unnecessary own goal?
6. DISCUSSION AND QUESTIONS
FOR MORE INFORMATION
Graham Berville
Tim Kirk
Senior Independent Advisor
Partner, Head of Financial Services Advisory Practice
Email: graham.berville@bdo.co.uk
Direct phone: 07788 726 781
Email: tim.kirk@bdo.co.uk
Direct phone: 07768 743 007
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