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March 2011

AFM letter to the Chancellor The Rt Hon George Osborne MP

February 2011

Dear Chancellor

Association of Financial Mutuals letter ahead of the Budget

With the Budget coming up on the 23 March we wanted to set out some ideas for how to successfully increase people’s desire to take control of their finances and savings, at a time where there is little or no capacity to offer incentives via tax breaks or ‘free money’.  We see the mutual sector as having a key role to play in this.

A budget for personal fiscal responsibility

Our society is putting increasing onus for the future on people taking more responsibility for managing their finances.  This means that young people will need to better understand the value of building up money for education fees, or house deposit, or for the longer term; and older people need to understand that the state pension will not fully satisfy their needs for income in their later years.  Everyone needs to take account of the wider economic climate and the risk this poses that unless substantive action is taken, many of the services we have come to expect from the welfare state will no longer be affordable.

We believe that as mutual organisations, we can help support government in encouraging the need for individuals to take greater responsibility for their finances.  Amongst some of the options we would like to explore are the following:

  • Mutual insurers hold significant volumes of capital: unlike building societies this money is not lent to borrowers, but is instead invested- legislative dictates that we invest in equities, property, or gilts.  Were mutual insurance enabled to issue bonds for consumers and given permissions to invest in a wider range of options, some of their holdings could be put to more practical use in the real economy and to support government initiatives.  This might include investment in long-term capital instruments that support infrastructure projects, or community-based Big Society projects, or in providing the seed capital that would enable the creation of new mutuals.
  • Given mutuals’ heritage of providing benefits before the welfare state, there is scope to contract out certain state benefits or roles to the mutual insurance sector.  For example it may be possible to re-engineer NEST as a mutual operation to deliver low-cost pension savings.  Also, the sector has significant experience of running products that sit alongside statutory sick pay and long term invalidity benefits.  Contracting out this work would enable employers to offload sick pay costs to insurers, individuals to have sick pay schemes tuned to their own circumstances, and generally reduce exchequer costs.
  • Similarly, we believe there is scope for a broader role for mutuals in UK healthcare, where AFM members already provide complementary services and would make ideal prospective partners to the NHS.
  • Financial education and empowerment are vital to people having the confidence to tackle their own finances.  AFM has invested significantly in education tools for young people to complement the extensive work of mutuals in supplying support and education to their customers, and in helping people who would otherwise be disenfranchised to get access to low cost and personal advice.

A legislative environment where mutuals can compete on equal terms

The mutual sector suffers from legislation that has failed to keep pace with company legislation, such that mutuals often operate at a significant disadvantage.  To be able to compete on equal terms with proprietary organisations and support government initiatives such as those explored above mutual legislation- such as the Friendly Societies Act and Building Societies Act- to be updated.  To illustrate: 

  • Better business initiatives introduced by the Companies Act are not carried over the mutuals without equivalent legislation- for example friendly societies are still unable to adopt electronic communications with their members, despite this being introduced for companies in 2001, because the relevant legislative order has never been made.
  • Legislation and Treasury/ FSA policy development is often framed almost entirely with the shareholder owned model in mind.  This means for example that a shareholder organisation can reasonably separate the interests of shareholders from policyholder, but where a mutual seeks to ascribe value to members this is misrepresented in regulation as part of the return on investment as a policyholder rather than the return on ownership- this has a profound impact on the viability of a mutual.
  • This failure to understand the fundamentally different nature of insurance mutuals is best illustrated in the prolonged stand-off that the sector has endured with FSA over “Project Chrysalis”.  Using a legal interpretation designed to protect the interests of policyholders over those of shareholders in a “reattribution” (such as those undertaken by AXA or planned by Aviva) FSA has stated that the working capital of mutual insurers effectively belongs to the with profits policyholders (not the members).  This position effectively ties the survival of the mutual sector to future sales of with profits policies and ignores the fact that mutuals have, both in the past and today, offered many other types of insurers.  In its intransigence the FSA is effectively signalling the demise of mutual insurance in the UK despite the policy intention of successive Governments to promote mutuality.
  • The Retail Distribution Review is focused on making adviser charges and status transparency and on increasing the professionalism of advisers.  Those are worthwhile ambitions, but the approach FSA has undertaken means that the mass market and poorer households- which mutuals focus on- will be unable to access advice just at the time where the need for personal fiscal responsibility demands that they need it. FSA needs to actively address demand for ‘simplified advice’, and in future CPMA should have a statutory responsibility to widen access to products and advice.

We hope that in the Budget on 23 March, there is opportunity to consider the issues that affect people in their everyday lives.  We trust in turn there is scope to involve mutuals in the development of new policy, and look forward to working with the new government across these themes.

With that in mind, we welcome the opportunity to meet with relevant Ministers to explore how mutuals can provide meaningful support to their work.

Yours sincerely,

Martin Shaw

Chief Executive

Association of Financial Mutuals

About us

The Association of Financial Mutuals (AFM) was established on 1 January 2010, as a result of a merger between the Association of Mutual Insurers and the Association of Friendly Societies.  Financial Mutuals are member-owned organisations, and the nature of their ownership, and the consequently lower prices, higher returns or better service that typically result, make mutuals accessible and attractive to consumers.  

AFM currently has 57 members and represents mutual insurers and friendly societies in the UK.  Between them, these organisations manage the savings, protection and healthcare needs of 20 million people, and have total funds under management of over £80 billion.


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