UK: With-profits Mutuals – FCA confirms the way forward

The FCA has at last confirmed that it will help mutual life insurers to avoid closure once they can no longer write material levels of new with-profits business. In a move designed to promote competition in retail financial services, the FCA has agreed to implement FSA proposals that aimed to allow mutuals with a viable business plan to transition from with-profits to non-profit products. Providing this lifeline is both long overdue and extremely welcome.

Key points

• The FCA's proposed method of effecting a separation of interests in a mutual insurer's common fund allows it to consider proposals on a case by case basis without the formality and expense that would necessarily accompany a formal restructuring (e.g. through a scheme of arrangement).
• The FCA has acknowledged, for the first time, the legal uncertainty that surrounds the definition of the rights and interests of with-profits policyholders in assets held in mutuals' common funds, particularly when their with-profits business goes into run-off. 
• Despite such recognition, the FCA's updated statement of its legal position is disappointing as it does not address all the concerns which had been raised with previous statements published by the FSA. 
• More helpfully, it seems that final determination of the nature and extent of with-profits policyholders' "interests" in a mutual's common fund is no longer a prerequisite to obtaining FCA agreement to the establishment of a members' mutual fund.

In a previous briefing, we looked at the FSA's December 2012 consultation paper ("CP12/38"), which demonstrated a commitment to finding a way for mutuals experiencing declining levels of new with-profits business to stay in business.  It has taken over a year for the FCA to publish its feedback statement ("PS14/5"), causing concern that the FSA's proposals may go no further.  Seemingly, those concerns were unfounded and the FCA, like the FSA, wishes to see a thriving mutual sector for years to come.

Our briefing looks at issues covered by PS14/5.  It also considers the response of the Prudential Regulation Authority ("PRA") to CP12/38 (see Supervisory Statement "SS1/14"), which was published on the same day as PS14/5.  Please contact Geoffrey Maddock, Alison Matthews or Barnaby Hinnigan if you would like to discuss any of the issues covered in this briefing.