March 2011

Update from the Chief Executive

profile-pictures-shawWelcome to the latest edition of Mutually Yours - 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.

The 2010 reporting season is now underway- leaving the large bonuses and profits in the banking sector aside, there have been some encouraging trends in mutual insurance.  A number of AFM members have posted excellent levels of growth for 2010, but positive sales results are tempered by uncertainty about the future. 

2011 is expected to be a tough year for savings in particular, and whilst general insurance earnings seem more secure competition is becoming tougher.  And as we discuss later in this newsletter, proposed new rules for the selling of with profits, and this month’s ruling on the gender directive, bring new challenges for product and marketing development.  Mutuals have shown themselves to be resilient during the financial crisis, and more innovative than the sector as a whole, and I suspect they will be drawing on those characteristics ever more this year.

News coming in this morning about the massive earthquake and tsunami in Japan puts everything into perspective, though we can expect the insurance industry over there to have a vital role to play over the coming days and weeks.  Our thoughts go out to everyone affected.

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


If you have any comments, please contact

Also in this edition:

  • Firing Line: an interview with new AFM Chairman John Reeve
  • Governing risk: Untune that string and hark what discord follows
  • AFM letter to the Chancellor ahead of the Budget
  • Mutuals lead the way in publishing claims statistics
  • “Flexibility is key”- profile of Fiona McBain by Business 7 magazine
    Please follow the separate links to these fascinating new articles.  

1. AFM Activity

  • AFM Conference 2011 

The AFM conference this year will be held in Manchester on 3rd and 4th November.  We are close to finalising the venue and are beginning to look at the programme.  Full details will be issued in the near future- please hold the dates in your diary!

In the meantime, I am interested in hearing from or about possible presenters who may be interested in talking at the conference about subjects that demonstrate the forward looking nature of the sector.

  • Effective governance

These days the effectiveness of Board governance is under ever closer scrutiny. Last month I provided a list of a number of governance related issue, and do so once again, to reflect a number of significant new outputs in this area: 

  • AFM has issued questionnaires to all members for this year’s compliance exercise for the Annotated Corporate Governance Code.  Larger members should aim to complete the questionnaire and provide an extract by end of April, whilst smaller companies have a deadline of end of July.  The exercise provides important evidence of governance in mutuals.
  • The Financial Reporting Council has issued new guidance on Board effectiveness; the guidance reflects the changes that were made to the UK Corporate Governance Code in 2010, such as the greater emphasis placed on the role of the chairman and the importance of getting the right balance on the board.
  • FSA recently produced a note giving feedback on its recent seminars on ‘governance in retail firms’.  This covers board effectiveness, NEDs and risk appetite, and will be useful reading .
  • FSA’s recent consultation on with-profits (CP11/5) includes a chapter devoted to governance of the with-profits fund.  The paper suggests that the with-profits committee is not functioning effectively in many with-profits providers, and suggests it needs to be seen to be more independent of the Board, and proposes new powers.  Whilst smaller firms (now defined as those with assets below £500 million) are not required to have a with profits committee, where they elect in future not to have one they must appoint an independent person with similar duties.  These proposals provide a significant change to the way with profits funds are governed, and those firms affected will need to think carefully about the implications.
  • Elsewhere, AFM’s recent internal audit network including a session on governance (slides are available to view by AFM members on the AFM website), and a separate article in this month’s newsletter looks at risk governance.
  • 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, but 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. 

A good number of AFM members have eagerly taken up the free offer, and we are getting very positive feedback about the training materials.  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.

  • Gender on the agenda

The ruling by the European Court of Justice, that insurance must forego its much-valued exemption to the gender directive has been greeted by alarm, if not surprise by many.  The ruling does at least give the industry until late next year to reform its approach to pricing within affected products, although the deadline of late 2012 clashes with many other major projects.

So it will be interesting to see how providers respond.  Already in the trade press there have been suggestions that some firms will adopt proxy measures for gender such as height.  This and other direct proxies I’d suggest are no less discriminatory that gender and should not be used.  It is after all the relative risk that insurers are seeking to underwrite.

Does this mean standardised rates for all, and higher costs for consumers?  The former- no; the latter- possibly. Markets such as annuities, life cover and motor insurance are very competitive, and this will encourage firms to seek to price with more sophisticated techniques, such as health and lifestyle- which after all are better indicators of risk than gender.  And it’s worth considering Holloway income protection- for over 100 years these policies have not generally used gender to differentiate prices, and yet their premiums are often much lower than those on comparable products.


2. Regulatory Issues

  • Mutuals and With profits

FSA has now released its consultation on “Protecting with profits policyholders”, CP11/05.  The paper, which was delayed from last year, follows up on the July with profits review, and will be followed up later in the year by a further consultation, covering the customer communication issues identified in the review, and the implications of Solvency II for with profits.

There is much coverage in the paper on FSA’s engagement with mutuals with a with profits fund, and FSA seeks new rules and guidance to cement its views- suggesting industry responses to its Dear CEO letters betray a misunderstanding of FSA’s position.  In particular FSA accepts that where mutuals are not writing material volumes of new with profits, “the run-off of with-profits may, in some cases, have the consequence that the mutual is unable to write any new business, and thus ultimately lead to the winding up of the mutual”- though FSA stresses that in such circumstances winding up is not inevitable.

This issue remains the top priority of the AFM Board, as well as the Boards of many of its members, and risks deflecting attention away from growing the business or achieving other regulatory change projects.  FSA’s position is based on legal advice it received in 2008, and as MPs pointed out in a recent parliamentary debate on financial mutuals, this advice has not be shared with the industry, though FSA has since confirmed the summary attached to the Dear CEO letter in 2009 was substantively the entire advice.  The AFM Board will therefore carefully consider its response to the consultation, and comments and contributions are welcome.

Whilst the section on mutuals has specific areas of concern for the sector, the paper more general provides significant food for thought for the with profits industry:

  • the with profits committee (or independent person in firms with assets less than £500 million) will need to be more clearly independent of the Board, and is given significantly greater powers;
  • the section on conflicts of interest creates a new rule to highlight a whole range of conflicts in with profits funds which FSA consider may lead to unfairness;
  • new business written on subsidised terms: FSA has indicated two firms are in enforcement, and all firms will need to consider whether they can write new with profits business profitably;
  • reducing volumes of new business: FSA is increasingly intent on acting on firms that are writing low volumes of business, encouraging them to consider run-off plans;
  • the polar distinction between open and closed funds will diminish, and funds closed before 2005 will require run-off plans.

One of the stark contradictions the consultation paper exposes is that FSA’s powers are focused entirely on the interests of policyholders.  As such they have no great interest in the interests of other stakeholders- for this reason they ascribe no or little value to membership, even though members of mutuals are their owners.  By the same token, FSA is content to allow big insurers like Prudential to freeze annual bonuses for its four million with profits policyholders, whilst announcing this week that profits were up sharply and that shareholder dividends for 2010 were to be increased by 20%.

I haven’t yet come to terms with how big proprietary companies are deemed to be treating with profits policyholders fairly whilst failing to secure equivalent increases in the value of the with profits fund, whilst mutuals, as our research continues to evidence every year, outperform the sector averages massively and offer superior service, and yet are challenged on fairness.

The deadline for consultation responses is 24 May.  

  • 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.

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.  However general insurers reported concern about the treatment of catastrophe models.  The European Union is beginning to consult on a transition period which might allow firms beyond the deadline to achieve the required capital level.

Most recently the focus of concern has been on large international insurers, due to the lack of consistent regulation outside Europe, and the risk that capital held elsewhere in the group will not be taken into account in European arms of a group.  As ratings agency AM Best put it “the lack of fungibility of capital and the revision of business strategy could have negative rating implications”.

Those issues may not be as acute for the UK mutuals, where the cost of compliance is at least as significant a concern as the potential for higher capital requirements.  Regulators have been quite slow in identifying how to ensure the new regime is proportionate.

FSA’s recent consultation on its 2011/12 levy including a provision for special project fees, the equivalent of half the base levy for the insurance sector.  The paper also indicates that there was a significant underspend on the special project fees in 2010/11, and that this will also be carried forward to the current year.  In total therefore FSA plans to exert three times as much effort on Solvency II in 2011/12 than it did the previous year- and AFM members should expect a similar increase in their own costs and engagement on Solvency II.

FSA will publish results from the QIS 5 exercise in the coming months, and has recently published new guidance for smaller insurers on its website, to help firms produce implementation plans.  All insurers likely to fall in the scope of Solvency II have been invited to an FSA conference on Solvency II on 18 April, and I encourage all firms to attend.  Whilst this might not be suitable for non-Directive friendly societies, FSA recently confirmed to me that it is looking at their capital regime post-Solvency II and aims to consult on this later in 2011.

  • Retail Distribution Review

The other key focus of attention remains the RDR, which once again has an implementation date of the end of 2012/ start of 2013.

There is still a great deal to be clarified before then, and in AFM’s recent submission to the Treasury Select Committee’s inquiry into the RDR, we concluded that the current timetable was no longer tenable, and that the original aims of the RDR (specifically, “a market which allows more consumers to have their needs and wants addressed”) had been lost.  As a result too little attention has been given to how to enable anyone other than the very wealthy to access effective financial advice post-RDR. 

I conclude that some providers will be forced to withdraw some or all of their products on 1 January 2013, because they have not had sufficient lead time to revise marketing and disclosure material, re-price products, review IT systems, prepare updated business strategies, re-train salesforces, co-ordinate work with other key projects, or communicate with consumers and other third parties.  AFM is meeting with FSA on a regular basis to explore some of these issues.

One of the challenges for the RDR team is that, compared to Solvency II, they have not enjoyed the consistency of management attention or budget needed to deliver effectively on the objectives of the project.  With the prospect of greater scrutiny encouraging more resource we can expect more focus in the coming months, and FSA’s revised RDR microsite has some useful information for firms.

  • Other regulatory issues in brief 
  • FSA has published its annual Risk outlook document, which crystallises current and emerging risks.  The AFM Regulation Committee met with the authors of the report last year to help identify and calibrate relevant risks.
  • A recent speech by Hector Sants looked at the future of insurance regulation, including Solvency II and the new supervisory structure.
  • FSA and Treasury have responded to Europe on proposed revisions to the IMD (Insurance Mediation Directive) and PRIPs (Packaged Retail Investment Products), and AFM is involved in their consultative group.
  • FSA recently issued a discussion paper on product intervention as part of its more intrusive approach, and has invited AFM to participate in roundtable discussions in April.
  • AFM recently met with ABI to discuss concerns about due process in the Financial Ombudsman, and is cataloguing cases that usefully illustrate this.
  • AFM has highlighted to the FS Compensation Scheme industry concerns about the way supplementary levies were issued in relation to Keydata, and the failings in the process of engaging with the sector.


3. Political Issues

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

As I reported in February, the Chief Executive of the FSA, Hector Sants, was the main witness at the second session of the inquiry into diversity in financial services.  He promised to respond in writing to the inquiry on a number of points, and these views will be reflected in the report of the inquiry which is due in a few weeks time, once the relevant Minister, Mark Hoban MP has given evidence at its final witness session.

Meanwhile Gareth Thomas MP (Shadow Minister for Business, Innovation and Skills) recently secured a parliamentary debate  on financial mutuals.  Many MPs spoke positive about the value of the sector and the need to encourage diversity; in response the Minister stated that: "The Government want to create a financial services sector that works differently and is driven by different values, which is why we are committed to implementing measures that will foster diversity in financial services, promote mutuals and create a more competitive banking industry." 

  • Treasury consultation on the new regulatory system

Treasury has published its second consultation on the new regulatory system.  The document provides more detail around the roles and responsibilities of the new regulatory authorities, with the two firm regulators now known as the Prudential Regulatory Authority and the Financial Conduct Authority (PRA and FCA respectively).

AFM responded to the first consultation, and we were particularly pleased that the second paper adopts out recommendation that in future the new regulators should formally evidence that they have taken mutuals into account in the development of their rules.  The paper proposes that the Government will modify the consultation requirements for both the PRA and FCA so that they must provide not only an analysis of the costs which will arise from a proposed rule, but also an analysis of the extent to which those costs (and benefits) affect mutually-owned institutions differently to other ownership models; this analysis will be undertaken alongside the usual cost-benefit analysis.”

The deadline for responses to the consultation is 14 April, and AFM will use this as a way of reinforcing the views expressed in our previous response, including the proposal which is gaining wider support now that the Ombudsman and Compensation Scheme should be subsidiaries of the FCA.  AFM has been invited by Treasury to meet to discuss some of our views ahead of the consultation deadline.

Beyond that, Treasury will be commencing pre-legislative scrutiny before the summer recess, to ensure the new system is up and running by the end of 2012.  In recognition of this FSA is busy completing an exercise to shadow the new regulatory system, which will see all insurers supervised in the same division from a few weeks time.  FSA and the Bank of England are writing to CEOs of all firms likely to be supervised by the PRA (which would include almost all members of AFM) to invite them to a conference on 19 May.

  • Other government activity in brief
  • Junior ISA: AFM is well-represented in talks about the form of a new Junior ISA (planned for release in the Autumn).  Treasury plans to consult on product features shortly.
  • AFM met with Chris Leslie MP (Shadow Treasury Minister) in February and has share follow up correspondence with him since on how government and regulator can better deliver on the cross-party interest in securing a strengthened mutual sector.
  • AFM is meeting Treasury and HMRC in March to discuss Insurance VAT.
  • The AFM Taxation Committee continues to engage regularly with HMRC on the planned new tax regime from 2013.
  • Treasury has made the relevant order to finalise legislation that enables Electronic Communications in mutuals.  This follows extensive lobbying from AFM, and members may wish to consider whether any rule changes are needed at this year’s AGM to benefit from the changes.
  • In Europe as well there is welcome and growing support for the mutual sector. The European Parliament is currently conducting a study on “mutual societies in the 21st century” and the European Commission will start a comprehensive study on the situation of mutuals in all Member States later this year.

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, financial fraud and what the Board expect of the CFO.
  • COO network: the next meeting of the network is planned for 11th May at the offices of Oddfellows Friendly Society in Manchester. 
  • Corporate Secretaries/Compliance Officers Network: the next meeting of this network will take place on 14th April, at the offices of Moore Stephens in London.  Details of the venue and agenda will be circulated in due course.
  •  Internal Audit Network: the first meeting of the new Internal Audit network took place on 3 March.  This was a very well attended event, and slides from the presentations are available on the AFM website.  We are planning the next meeting for September/ October.
  • Smaller societies and mutuals Forum: the next meeting of this forum is now set for 4 April in London.  The agenda will include the opportunity to discuss topical issues put forward by members, such as: with profits; the RDR; working together and employment matters.
  • CEO Forum: we are planning our first CEO forum for 20 May in London (this meeting has been moved back one day to avoid a clash with an FSA/ Bank of England conference covering the role of the PRA).  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.
    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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