Dear CEO | Release Date: 25th April 2019
To read a shorter summary of this Dear CEO letter, click here.
To access the original FCA document, click here.
Long Summary
The Financial Conduct Authority (FCA) has issued a thematic review focused on the fair treatment of with-profits customers, highlighting key findings and outlining both good and poor practices observed in the management of with-profits funds. This review is particularly directed at firms managing with-profits businesses and serves as a guideline for improving management strategies to enhance customer outcomes.
Review Scope and Methodology
The FCA assessed a sample of firms to identify high-risk areas potentially leading to significant customer harm. The review examined several key outcomes that firms managing with-profits funds should aim to achieve, which are deeply rooted in the existing FCA rules and guidance.
These outcomes include:
Outcome 1: Ensuring an appropriate investment strategy is implemented for the fund, which is regularly monitored for its ongoing appropriateness and the terms on which it is implemented.
Outcome 2: Developing an overall capital management approach that fairly balances the interests of different generations of with-profits customers.
Outcome 3: Appropriately considering the risk borne by different stakeholders when allocating rewards from the use of with-profits fund capital.
Outcome 4: Establishing a governance framework that results in the fair treatment of with-profits customers.
Key Findings
General Observations
The majority of firms demonstrated reasonable care in managing the risk of customer harm in their with-profits businesses. This was particularly evident in their approaches to investment strategy, management, and overall governance.
Areas of Poor Practice
Run-off Plans:
Many firms with closed with-profits funds did not fully utilise their run-off plans as intended. These plans, essential for managing the ongoing run-off of a closed with-profits fund fairly, were often outdated and not integrated into day-to-day management practices.
Assessments of Excess Surplus:
Several firms failed to conduct annual assessments of excess surplus as required by FCA rules, posing a risk to intergenerational fairness among with-profits customers. This neglect could lead to some customers not receiving their fair share of the fund’s estate.
Fund-level Capital Management Approaches:
Some firms lacked clear definitions or policies for establishing desired levels of reserves to protect against risks within their funds. This absence increases the risk of failing to balance the fairness of pay-outs for existing customers with the security of benefits for continuing customers.
Recommended Actions and Next Steps
Immediate Actions for Firms
Review and Remediation: Firms are expected to review their practices concerning with-profits funds in light of the findings from the thematic review. Any identified shortcomings should be addressed promptly to ensure compliance with FCA expectations.
FCA’s Planned Actions
Engagement and Discussions: The FCA plans to engage with senior managers through round-table discussions to gather feedback on the review findings and to understand the industry’s response.
Supervisory Interactions: The findings from this review will be discussed with firms as part of the FCA’s normal supervisory processes.
Potential Further Actions: If firms fail to address the areas of poor practice highlighted in the review, the FCA will consider the need for further regulatory actions.
Special Focus
With-Profits Advisory Arrangements (WPAAs): The FCA is considering conducting focused work on the use of WPAAs, especially to understand the impact now that individuals involved are classified as senior managers under the Senior Managers & Certification Regime (SM&CR).
Conclusion and Takeaways
The FCA’s thematic review on the fair treatment of with-profits customers provides crucial insights into both the commendable practices and areas needing improvement within firms managing with-profits funds. Key takeaways include the necessity for firms to keep run-off plans and assessments of excess surplus up to date and to define clear capital management strategies. By adhering to these guidelines, firms can significantly improve their management of with-profits funds and ensure fair outcomes for all customers. It is imperative for firms to take this review seriously and implement necessary changes swiftly to avoid potential regulatory actions from the FCA.