Governance of Mutuals

Implications From The FSA’s With-Profits Review

Graham Berville Senior Independent Advisor BDO LLP

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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 policyholder communication

and 2. Weaknesses in relation to

Interest.

COBS

Chapter 20.

Principle 6 Customers Interests. Principle 7

Communication

& Principle 8

Conflicts of

FSA WITH PROFITS REVIEW

“The findings were particularly

disappointing in light of our previous communications

to the sector.” “We are

action intervening now and taking strong

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: • Payouts: • Capital: Costs charged to policyholders the costs incurred in running the fund.

• New Business: existing policyholders materially worse off.

Fair, and policy conditions such as MVR’s applied fairly and proportionately.

• Investments: Terms for writing new business do not make Appropriate to the fund and do not prevent policyholders from receiving fair payouts.

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

Senior Independent Advisor Email: [email protected]

Direct phone: 07788 726 781

Tim Kirk

Partner, Head of Financial Services Advisory Practice Email: [email protected]

Direct phone: 07768 743 007 © 2010 BDO LLP. All Rights Reserved.

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