February 2011

Update from the Chief Executive

profile-pictures-shawWelcome to the first edition of Mutually Yours for 2011.

Mutually Yours is the online newsletter from the Association of Financial Mutuals. This newsletter is widely dispersed to AFM members and other interested parties- but do feel free to forward to colleagues, and encourage them to write to to be added to the distribution list.

If this month’s newsletter is characterised by only one thing, it is the increasing complexity of running a mutual insurance company in the UK. For the most part, mutuals are shaping up well to a world where there is closer scrutiny of governance, of solvency and of fairness to customers, and we have a good story to tell in all these areas. Indeed it is encouraging to see once again that mutuals seem to have been growing market share significantly again in 2010.

But we live in a world where change is relentless and where the impact of change is ever greater. But rather than ponder on these further here, I will leave the remainder of a fuller than usual report to describe some of the key initiatives of AFM.

I hope you enjoy reading this month’s edition of Mutually Yours.


If you have any comments, please contact

Also in this edition:

  • Associate member Rensburg Sheppards’ market outlook
  • New partnership between AFM members Benenden and Engage Mutual
  • AFM PR report for Quarter 4 2010

Please follow the separate links to these fascinating new articles.

1. AFM Activity

  • New AFM Chairman

In case you are not already aware, John Reeve, CEO of Family Investments, was appointed Chairman of AFM by the Board in January, to take over from Mike Yardley of Royal London who is stepping down. Mike has done a wonderful job in helping launch AFM and providing support in our first year of operations, and we are planning an extensive range of activities for our new Chairman for 2011. Mark Goodale of Reliance Mutual has been appointed Vice-Chairman. See our press release for more details.

John will of course be officiating our 2011 conference - details will be announced shortly, but in the meantime you may like to know that the dates are planned for 3rd and 4th November.

  • Corporate governance

Corporate governance remains under close scrutiny in financial services, and the following initiatives by AFM demonstrate that we are keen to see the financial mutuals sector continuing to work towards the highest standards:

  • Towards the end of last year we re-issued our governance code, the Annotated Corporate Governance Code, which mirrors the requirements of the Code for listed companies overseen by the Financial Reporting Council. The report on compliance with the ACC in 2009 showed that standards of governance are being maintained, and that smaller companies have been working hard to match the high standards already attained by the larger AFM members. Copies of the report are available on request, and members can download via the AFM website: latest ACC and report.
  • Compliance with the ACC is maintained via our annual questionnaire, and by ‘comply or explain’ reporting in each member's annual report. This year’s questionnaire is being sent under separate cover to CEOs of AFM members, and again we will be compiling results later in the year.
  • We have been working with Treasury on a panel that has explored the value of a single code for all financial mutuals. This work was initially launched by the previous Government, and it is unclear how it might now progress. Depending on whether or not this work progresses, we will take a view on whether we need to make any further changes to our ACC.
  • In light of the changes to FRC’s Code, AFM has made changes to its constitution: firstly to make compliance with our ACC compliance exercise (or a similar equivalent) a condition of membership; and secondly to adopt the annual election of directors for AFM. We will be writing to members in more detail about the latter in due course; in the meantime the revised constitution is available to view on the AFM’s website: AFM constitution
  • As we mention in a separate report, AFM in conjunction with Thring Townsend has released its first report into Remuneration in mutual insurance.


  • Modernising Mutuality

There has been a great deal of discussion in political circles about the role of the mutual sector in the future.  Already the mutual model is being seen as a real alternative to the current structure in some government departments and in the Post Office.  And Professor Julian Le Grand of the LSE, has been asked by Francis Maude, Cabinet Officer Minister to lead a new Mutuals Taskforce to drive reform at the centre of government.

Government has been less forthcoming about the future role of financial mutuals, and mutual insurers in particular.  The inquiry into corporate diversity in financial services, covered below, is a positive initiative, and we have seen strong words of support for the sector from politicians of all parties.

The AFM Board is keen to help the Government identify how the mutual insurance sector can play a continued and vital role, and is in the process of commissioning new research from a respected think tank, to make recommendations.  More details will be provided in future on this vital opportunity for the sector.

  • The new AFM Training Portal

I wrote to CEOs of AFM members in January to mark the launch of our new training portal.  This is a great development for AFM, and delivers high quality online training to members.  Initially this is being run as a pilot paid for from AFM funds, with a module on Information Security.  However if the pilot is successful we plan to issue more titles.  Each AFM member is entitled to take up a number of licenses for free, and can purchase further for the same or different topics, at very low cost. 

Already we are getting very positive feedback about the training materials, and several enquiries about extra content.  This is very much dependent on members using the free resource and letting us have their comments.

Please contact me if you need more information, or view the portal here.

  • Mutual Insurers’ Remuneration report

At the end of 2010 AFM launched its first remuneration report, in association with Associate member Thring Townsend, and I am very grateful for their significant work in gathering the data and producing the report. 

The report looked at executive and non-executive pay in the sector, based on data largely derived from member accounts.  The primary use of the report is to help member’s benchmark their pay and conditions against the rest of the sector and to review trends in governance.  Amongst other things the survey reveals: 

  • The median total remuneration in 2009 for CEOs of larger AFM members was £313,373; for smaller members £115,116; the median for Chairmen’s remuneration was £51,325 for larger members and £16,772 for smaller members;
  • Executive bonuses amongst AFM members average 19% of base salary, compared to 60% for FTSE 250 companies (though it should be stated for balance that the range is significant, and of course only a few AFM members are of an equivalent size to FTSE 250 companies- though we have found it difficult to make more relevant comparisons);
  • 12.4% of NEDs in larger mutuals are female, compared to 7.8% in FTSE 250 companies.

We are keen to understand whether the report is useful, and what more or different we might focus on, with a view to producing the survey annually.  With that in mind, please remember to send in a copy of your accounts when they are ready, and contact me or Robert Wharton of Thring Townsend ( ) for more information about the report.

  • New Associate member

At its January meeting the AFM Board welcomed Rathbones as a new Associate member.  Rathbones exhibited at the AFM conference, but for those of you not familiar, the following extract from their application might be useful:

“Rathbones is one of the UK’s largest and longest-established providers of high quality, personalised discretionary investment management services. Our clients include private individuals, trustees, directors and not for profit organisations.  We are part of Rathbone Brothers Plc, an independently-owned FTSE 250 company with a current market capitalisation of some £474.5 million (as at 31st December 2010).

We currently have over £14.5 billion funds under management.  This figure includes financial mutuals funds – an area where investment directors have a vast amount of experience.  This is particularly relevant with the changes that will occur with the implementation of Solvency II.”

We welcome Rathbones as our latest member.

  • Taxation update

The AFM Taxation Committee has been very busy working with other sectors and HMRC on the tax regime that will emerge post-Solvency II.  Members will recall that we collected extensive data about current tax arrangements last year and this has contributed to our discussions.  HMRC is now preparing summaries of its proposals for the relevant Ministers, in time for possible announcements at this year’s Budget in March.  AFM is sending in a separate submission to seek to ensure that future tax rules maintain the mutuality principle (broadly, that taxable trading profits should not arise on mutual business).  Legislation is likely to appear by the end of this year.

In the meantime, there is a range of other tax issues that we are looking at:

  • The need to assess the implications of adviser charging under the Retail Distribution Review, both on the VAT status on the advice but also on the qualifying policy of the product;
  • Proposals by the Office of Tax Simplification to explore the removal of a number of current and important exemptions: included in these are the possible loss of the exemption from Insurance Premium Tax of life policies; the removal of life assurance premium relief; top-slicing relief; the 5% withdrawal rule on life policies.  Not all of these will be taken forward but they could have a significant impact;
  • VAT: members are reminded to be vigilant about the VAT position; some AFM members report opportunities that emerge from reviewing partial exemption methods, from taking advantage of opportunities when they emerge and from identifying possible reliefs;
  • Insurance Policyholder Tax Manual: we have been in liaison over a number of years to review certain aspects of the Manual; a number of the revisions we have proposed are being acted on and amendments to the Manual are now being prepared, which should simplify some elements of policyholder tax.  We will let members know more when the changes have been completed.

Finally at a recent AFM Communications Committee meeting, one of the attendees confirmed that within their AGM mailing this year they were including a flyer for the Saving Squad, the AFM website that provides financial education for children.   As a result they were able to claim VAT exemption on the entire pack, as well of course as widening knowledge of this valuable resource. 


2. Regulatory Issues

  • Mutuals and With profits

FSA’s treatment of with profits in mutual organisations (so-called Project Chrysalis) remains our greatest source of frustration and concern as a sector.  Fourteen months after firms sent a response to the original Dear CEO letter a number have still to receive a formal reply from FSA.  We’ve received regular apologies from FSA for these delays and renewed commitments to treat replies as a greater priority, but this prevarication is a symptom of the fragmented approach adopted by FSA throughout.

The FSA Chief Executive, Hector Sants, was recently drawn into the issue when he appeared in front of a committee of MPs as part of the inquiry into corporate diversity in financial services (see other references below).  When asked by the committee whether FSA should review its legal advice, Mr Sants contended that FSA’s legal advice was extensive, and that as only nine of the 59 companies that FSA had written to had received their own legal opinion, and 'only' 34 had stated they categorically disagreed with FSA’s position, then in FSA’s view “the majority are comfortable” and there is no “unequivocal contrary legal advice”.  Not only does my maths tell me that is wrong, but if you consider that the majority of firms that did not conduct their own legal advice were very small organisations to whom FSA gave only eight weeks to prepare a response to its October 2009 letter, then that argument seems invalid to say the least.

Later in the exchanges, Mr Sants conceded that the FSA legal advice was obtained before the court ruling on the Aviva reattribution which confirmed that, in contradiction to FSA’s position, with-profits policyholders do not have an expectation of surplus distribution.  Mr Sants agreed to write to the committee with a detailed legal explanation of how FSA’s two Dear CEO letters accounted for this.

We continue to identify further areas of concern with FSA’s position- and I should stress this is very much with a view to finding a solution that is in the best interests of all our policyholders and members, and which allows FSA to resolve some of the possible contradictions in their approach. 

Meanwhile FSA’s wider consultation on with profits is due for release shortly, and as well as Chrysalis issues, this is likely to focus on governance, policyholder communications and charges within was is likely to be a fairly challenging document.

FSA loses its way

MPs convening in the House of Commons for the latest meeting of the inquiry into diversity in financial services were held up by ten minutes due to the late arrival of FSA Chief Executive Hector Sants.  Mr Sants explained that he was delayed because he went to the wrong location…

  • Solvency II

The European Union recently confirmed that the implementation date for Solvency II has been set back to 1 Janaury 2013.  This small change may yet prove valuable in potentially giving firms a further 12 months to comply.

On the whole though many AFM members gained some reassurance from the QIS 5 survey conducted last year, which suggested capital requirements will not be significantly greater than under the current regime.  That is not however the experience of all insurers, and indeed the European Union is beginning to consult on a transition period which might allow firms beyond the deadline to achieve the required capital level.

One important consideration for mutuals is how Solvency II affects broader aspects of their business, such as governance, accounting. tax, risk management and their investment portfolio.  This latter item was the subject of a recent AFM workshop hosted by JP Morgan- a link to the slides is included in the events section below.

FSA’s consultation on its regulatory fees and levies last week proposed two special project fees for Solvency II, amounting to £46 million across the insurance industry for 2011/12.  That is a clear indication that there is a great deal of further work to do.  Indeed FSA indicates that delays in the EU timetable meant it was not able to complete all its planned work for 2010/11, so the latest budget suggests work will be concertinaed into an even shorter period, and that the cost of actuarial support will reduce just as demand intensifies.

  • Retail Distribution Review

The deadline for the RDR is the end of next year, and of course this coincides with Solvency II implementation.  With the growing list of unresolved issues, it looks like there is an enormous amount of work to do to be ready in time.  But unlike Solvency II where FSA has invested significant resource already, the approach to the RDR seems inconsistent, and with regular personnel changes it has been difficult to see clear momentum building.

Indeed, as we said in our submission to the Treasury Select Committee’s inquiry into the RDR, FSA proposed outcomes have been severely diluted- the aim is no longer to deliver “a market which allows more customers to have their needs and wants addressed” (as FSA first committed to in 2006), but to achieve fairer charging and better qualifications (as explained to the TSC last year).  The stark difference is therefore the abandoning of the very worthy aim of meeting more people’s needs.  Indeed we predict the opposite will happen, ie less advice for the mass market and less affluent.  This can be avoided by: 

  • Returning to the original objectives of the project;
  • Identifying a suitable advice solution for people who will be priced out of independent advice (what FSA describes as “simplified advice”, but which it has not fully explored);
  • Revisiting the timescales for the RDR so that some elements are introduced to more realistic timescales.

For providers, a major impact of the RDR is the need to redesign products, charges and disclosure requirements.  These are massive undertakings for some companies, and there is a real likelihood that many products will not be available at the launch of RDR as firms have not been able to accommodate the, as yet still unfinalised, system changes.

The only positive you can find about reducing choice and access in this way, is that consumers who can’t get advice can’t be mis-sold- but is that really the best we can say about the RDR?

  • The other UK regulators

The other UK regulators have been making their presence felt recently.  The Financial Services Compensation Scheme recently sent out invoices to a number of AFM members as part of its supplementary levy following the collapse of Keydata.  This reflects the widening circle of funding that the Scheme can draw on to recover costs.  Whilst we highlighted concerns with this approach when FSA first consulted on it, the Compensation Scheme has a clear remit to collect money from a broad range of sectors.

Our concern therefore is not with the rules applied by the Scheme, but by the process it has adopted.  By failing to highlight the potential early enough, it has issued large invoices to firms that were not expecting them, in apparently unrelated sectors.  The invoices are badly timed (just after the annual budget was agreed and with little time to pay), and with many firms reporting errors.  Indeed we would argue that these invoices were unnecessary, given the products have a few years to run and therefore as yet no realised loss.  We are concerned therefore that the Scheme's work is poorly executed, and lacks proper accountability.

There are similar concerns with the Financial Ombudsman Service.  We agree strongly with its remit, but are concerned about its execution.  It is a very costly service, has poor transparency, and little regard to how to improve the effectiveness of the regulatory system overall.

Our solution in part is in both cases to use the forthcoming regulatory changes to move both bodies under the control of the proposed Consumer Protection and Markets Authority.  This will improve accountability, improve co-ordination, and resolve the gaps in the effectiveness of the regulatory system.  Not only that, it will reduce total regulatory costs, improve consistency for firms, and deliver better protection for consumers.

I had the opportunity recently to make some of these points at a meeting with an IMF project team, who were in the UK to test the effectiveness of the UK regulatory system.  We await their report; in the meantime I welcome your views on the strengths and weaknesses of UK regulation.

What is the right definition of a mutual?  Play spot the difference between FSA’s view and Europe’s…

In their October 2009 Dear CEO letters to mutuals with a with profits fund, FSA describes membership of a mutual as having “little or no value”.

A recent European Commission research document provides this definition:

The profits and surpluses of a mutual should not be used to pay a return on investment, but to improve the services offered to members, to finance and develop the insurance business for the benefit of members and to increase its own reserves for the benefit of future generations.” 

As we increasingly see regulation developed in Brussels rather than London, perhaps this holds fewer fears of poor regulation that we might have thought.


3. Political Issues

  • All party group for financial mutuals’ inquiry into diversity in financial services

I’ve reported earlier on some of the recent exchanges in this inquiry.  The all-party group is a cross-bench group of MPs and peers that volunteer to participate in groups they find of interest.  The strong words for the sector that many MPs are expressing through the inquiry, or directly in conversation, are very encouraging.

We are therefore very grateful to the group for running this inquiry, and we believe the results will prove beneficial to the sector.  As well as hearing submissions from the Chief Executive of the FSA and from the relevant trade bodies, the inquiry has also asked the Financial Secretary, Mark Hoban, to give evidence at its next meeting.  This will be a real chance to explore how the government believes the financial mutual sector can play a growing role in the future.

The inquiry will be completed by the publication in the next few weeks of a full report on its findings.

  • The Gender Directive

There has been a growing sense that the 2008 EU gender directive will remove the exemption currently enjoyed by some insurance products that use gender as a factor in setting price.  Previous UK legislation has accepted that where there is actuarial evidence to support lower premiums for either men or women for certain contracts, then those differential premiums do not infer discrimination.  Differing life expectancy means that typically women enjoy lower premiums for protection policies, and men earn higher income from annuities.

A recent test case on the directive appears to conclude that such gender can no longer be used as a determining factor, because gender is a characteristic over which an individual has no influence.  This means that premiums for men and women would need to be equalised, subject to other risk factors such as behaviour, diet, health etc.

Mutuals in particular would find it difficult to equalise premiums down- FSA is very clear that firms should not take on new business at subsidised rates.  That suggests an increase in premiums will result or else a reduction in benefits- in other words there will be losers but no winners.  The judgment on the test case also indicated such an approach would be applied retrospectively, subject to a transitional period.

The issue will be decided finally by a judgment by the European Court of Justice.  AFM members will need to begin exploring the consequences for product pricing and for their existing book of business.

  • Other government activity
  • Government is continuing to explore the development of a Junior ISA to replace the Child Trust Fund.  It is expected that the product will launch in the Autumn now, and a statement is expected in the Budget on 23 March.
  • AFM recently had the opportunity to disscuss mutual issues with Shadow Treasury Minister Chris Leslie, who stressed his strong support for the sector, and is keen to ensure the government deliver on their commitment to strengthen mutuals.
  • Treasury has confirmed to the Joint Money Laundering Steering Group that its 2009 guidance for the financial sector has been approved by Ministers for the purposes of Regulations 42 and 45 of the Money Laundering Regulations 2007, sections 330 and 331 of the Proceeds of Crime Act 2002, and section 21A of the Terrorism Act 2000.
  • The attached note provides information on the cancellation of identity cards.

4. AFM events

  • CFO network: the network is due to meet on 16th March at the offices of NFU Mutual in Stratford-upon-Avon. The meeting replaces that cancelled in November and will carry forward agenda items on IFRS, Solvency II and financial fraud.
  • COO network: the network met on 10th November at Royal London’s offices in Wilmslow. The well attended meeting included stimulating discussions on Information Security, Solvency II, regulatory issues and risk management. The next meeting is scheduled for May, at the offices of Oddfellows Friendly Society in Manchester.
  • Corporate Secretaries/Compliance Officers Network: the next meeting of this network will take place in March/April. The main subject to be covered is strategic risk, and the meeting will include a section on risk and due diligence on transfers of engagements.  Details of the venue and agenda will be circulated in due course.
  •  Internal Audit Network: heavy snow postponed the first meeting of the new Internal Audit network: this will now take place on 3 March. We are currently at capacity, but please contact me if you would be interested in attending.
  • Smaller societies and mutuals Forum: the next meeting of this forum is now set for 4 April in London, hosted by GainLine. The agenda will include the opportunity to discuss topical issues put forward by members, such as: Solvency II; with profits; the RDR; working together and employment matters.
  • NEW! CEO Forum: we are planning our first CEO forum for 19 May in London.  It is planned to invite the CEO or deputy from each member company, both as a mid-year update on our work, but also to cover key issues for the mutual sector at this time.  Further details to follow.
  • Other events for AFM members: On 27 January, AFM in association with JP Morgan, BNP Paribas, and Ernst & Young ran a workshop on “Solvency II implications for investment”, attended by around 80 people. Copies of the slides are available on the AFM website: Solvency II, 27 Jan 2011.
  • AMICE: “Connecting to the customer”; the European trade body for mutual insurers has kindly extended an invite to AFM members for this marketing-lead meeting, to be held in Paris on February 14-15.  The agenda includes a wealth of case studies on: internet based marketing; customer relations management; product marketing; and branding.  Please e-mail me if you’d like a full agenda and joining details.

For more information on the work of AFM, visit our websites: for members and all professional contacts. for consumers. for the youngest children, their parents and teachers. for 8 to 11 year olds, their parents and teachers

Please make a note of our office number, 0844 879 7863, and address, 7 Castle Hill, Caistor, Lincolnshire, LN7 6QL.

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