FSA to change definition of with-profits policy
Latest FSA consultation proposes changes it intends to make to with-profits and unit-linked products in light of the Solvency II directive.
The Financial Services Authority has proposed to change the definition of a with-profits policy to ensure it meets the narrower scope of insurance funds under the European Commission’s incoming Solvency II directive.
In a second FSA second consultation paper on the transposition of the rules, the regulator highlights that the current definition of a with-profits policy refers to it being a class of long-term insurance business that allows policyholders to be eligible to participate in any part of the established surplus.
However, the regulator intends to remove references to ‘surplus’ given the narrower definitions afforded under Solvency II and added that the “concept” of a long-term insurance fund does not apply in the Solvency II environment, so this too will be amended.
The FSA has instead proposed to use a description of with-profits funds which identifies the income and assets relating to these policies and the income and assets relating to non-profit policies in which the with-profits polices have an interest, for example by way of investment.
Firms will also need to ensure that policy terms, the established practice of the firm and communications from the firm are consistent with the identity and scope of the with-profits funds and sub-funds they have in place.
The FSA has also proposed there should be a handbook transitional provision to clarify that current with-profit funds will be ‘grandfathered’ over to be deemed to fall within the new definition.
The paper said: “We propose to include new guidance for Solvency II firms about our expectations of how firms will apply the prudent person principle in the context of their with-profits funds, including for strategic investments.”
This consultation programme is running alongside the Treasury’s transposition of Solvency II, through amendments to the current Financial Services Bill.