Mutual insurers in the UK look likely to have been granted concessions on the regulation of with-profit policies by the Financial Services Authority (FSA). This change from the regulator would bring an end to the industry's concerns over the treatment of ‘mutual capital', which has hampered the sector for the last six years.
Revised definitions of with-profits assets proposed in FSA consultation paper CP12/13 on the transposition of Solvency II had threatened mutuals' ability to continue to operate if both their with-profit and non-profit assets belonged to a single common fund.
However, new proposals set out in the regulator's consultation paper CP12/38 “Mutuality and with-profits funds: a way forward” (published in December 2012) would allow mutual insurers that operate a single common fund to divide it into a so-called 'mutual members' fund' and a with-profits fund for regulatory purposes.
Only the with-profits element of the fund would be subject to the rules for with-profits featured in the FSA's Conduct of Business Sourcebook (COBS 20) while the mutual members' fund would be available to provide the necessary capital with which to service non-profit business and the day-to-day running costs of the mutual.
The FSA says it has issued the consultation paper (CP) in order to respond to the concerns of the mutual with-profits sector which is faced with a decline in new with-profits business with the potential to lead to the closure of these firms as their with-profits funds run off. The FSA also states that this CP is directly relevant to all mutual firms writing new with-profits business or with existing books of with-profits business.
The new proposals were welcomed by Shaun Tarbuck, CEO, the International Cooperative and Mutual Insurance Federation (ICMIF), who said: "This threat from the FSA has been hanging over the mutual sector for more than six years now and is something I was personally involved in trying to alleviate when running the Association of Mutual Insurers (AMI), the precursor to the, now ICMIF member, the Association of Financial Mutuals (AFM). This is indeed a major breakthrough for UK Life mutuals and will allow them to move ahead with more certainty. The whole process does unfortunately highlight how regulators, whether on purpose or as a law of unintended consequences, can hold our sector back for so long. Let’s hope the regulator has the reflective skills to review their processes and the negative effect it has had on the mutual sector in the UK."
The new proposals were also welcomed by the AFM’s Director, Martin Shaw, who said: "The consultation demonstrates some fresh thinking from the regulator on its approach to mutual insurers with a with-profits fund, and therefore reflects the wider trend in public policy to, as the government has said, 'foster diversity and promote mutuals'."
There is still some uncertainty, however, over the costs and procedures involved in the separation of a mutual insurer’s funds. The new consultation paper states that firms must seek permission from the supervisor, and that "each proposal will need to be assessed on its merits" and will need to ensure a fair outcome for all relevant categories of policyholders, before being given regulatory assent. Mutuals will also need to use an independent expert to guide and support their application.
One very valid concern raised is that to separate out the various components of a common fund in order to gain the Supervisor’s approval will be an expensive and labour-intensive exercise. This has the potential to prevent smaller firms from taking this option. The level of complexity of a mutual may also have an effect on the costs involved. Costs will not only include that of the external expert but also actuarial costs, legal advice and, critically in the case of mutuals, member engagement.
However, the FSA stresses in CP12/38 that it will take a proportional approach to the process in order to avoid smaller firms losing out.
There are also questions around the process of modifying the COBS rules to allow the separation of funds to take place. The recognition of a mutual members' fund will be brought about by a change in the definition of a with-profits fund as it relates to COBS. However, CP12/38 specifies that any modification would be "time limited and therefore capable of being reviewed".
The FSA's consultation closes on March 19, 2013.