Welcome 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 martin@financialmutuals.org to be added to the distribution list.

Easter holidays for some mean that the reading material has been mounding up for a few days. In recognition of that, this month’s abbreviated version of Mutually Yours focuses on some of the main issues on the AFM agenda, specifically with-profits, and the continued work of the sector to deliver a better deal to their customers. You’ll see some particularly good examples of that in the articles accompanying my update.

We explore these themes further in this month’s articles: I hope you enjoy reading this month’s edition of Mutually Yours -

Martin

 

If you have any comments, please contact martin@financialmutuals.org

 

Also in this edition:

• Wesleyan shows continued growth in 2011

• A busy time at PG Mutual

• Scottish Friendly in the Community

• With-profits performance: you’re better off with a mutual

• Traded Endowment Policies and Treating With-Profits Customers Fairly 

   

Please follow the separate links to these fascinating new articles, or visit the website.

 

1. AFM Activity

• Owned By You, the new website for members of mutuals

On Wednesday 18 April we are launching our new website, Owned By You. The website aims to help members of mutuals understand more about the value of mutuals, as well as their rights as owners. We plan to use it as part of a campaign to broaden communication with members of mutuals, as well as to raise awareness more broadly about what mutuals do.

We talked to a few people ahead of the launch, and received some very positive messages amongst the following:

• Andy Love, Labour MP, member of the Treasury Select Committee stated: “The best mortgages, the best savings products, the best retail financial services in this country are provided by mutuals…we’re beginning to see some holes in the welfare state, and that’s a real opportunity for mutuals to provide those basic products that will give people real security.”

• Lord Newby, Liberal Democrat Treasury spokesman confirmed: “Mutuals have a track record of treating their customers better. Anyone who’s dealt with a non-mutual knows how difficult it is to engage with them. I don’t think the FSA has ever really understood mutuals; I hope that the new regulators will have a more sophisticated way of dealing with mutuals.

“Younger people do everything by the web: unless you’ve got a presence there, they’re not going to know about you; the challenge for Owned By You is to make sure people know it’s there, because if they do I’m sure they’ll use it.”

• Jonathan Evans, Conservative MP and Co-Chair of the All Party Parliamentary Group on Building Societies and Financial Mutuals commented:“The National Health Service was designed by Aneurin Bevan based on a friendly society in his home town of Tredegar; 40 years before the NHS people there could get access to a local doctor. There’s a new opportunity today for mutuals to make a contribution.”

• Adrian Bailey, Labour MP and Chair of the Business Select Committee, said: “One of my criticisms of the [mutual] movement in the past, is that it has not shouted its difference from the rooftops even though it’s got a very good story to tell…the public do, increasingly, appreciate the difference between mutuals and the proprietary sector. This website will go some way to promoting the idea, getting greater understanding of it, and hopefully strengthening the sector.”

• Jeff Prestridge of the Mail on Sunday added his voice: “There’s no doubt that the mutual sector is a competitive force in the UK...it’s a force for good relative to the PLC model. What I also like about mutuals is there’s a commitment to treating customers fairly - it’s not all about the next sale, it’s about trying to build a relationship with the customer.

“The government appreciates the value of mutuality within the financial services industry…but it missed an opportunity to give the whole sector a lift when it decided not to go down the line of remutualising Northern Rock.”

You’ll see more of the video interviews on the site, as well as a range of views from everyday people we interviewed on the streets of London earlier this month.

Whilst the website will be at the heart of the campaign, it will only be successful if members support it and reinforce the messages in their own communications and with local media. At the start of April we held a virtual meeting for marketing and communications experts in member companies to brief them on Owned By You and to encourage them to amplify the messages in their own website and presswork.

Mutuality is back in vogue: politicians are talking positively about the importance of supporting the sector, and mutuals themselves are increasingly looking to use their mutuality as a point of differentiation with shareholder-owned organisations. We are releasing new research alongside the website that shows that people trust mutuals more, and the articles that accompany this month’s newsletter reinforce the reasons why.

 

• Other AFM activity in brief

  • Corporate Governance and NEDs: last month’s newsletter had a particular focus on the role of  Non-Executives, and it was pleasing to note that we had more requests than usual to be added to the distribution list. Corporate governance remains a topical issue therefore and we are exploring options for providing more support to NEDs in particular. In the meantime we’ve been issuing regular updates to CEOs as members prepare for the annual Annotated Corporate Governance Code compliance exercise. Members are reminded that the deadline for completing the online summary is end of June.

 

2. Regulatory Issues

• Mutual capital and with-profits

FSA’s Policy Statement on with-profits was issued in March, and promised early engagement with the mutual sector to explore the concept of mutual capital more fully, ahead of a Discussion Paper later in the year. At the beginning of this month a number of AFM members attended a meeting with FSA to discuss some of the principles they were seeking to achieve from this further review, and supervisors are planning to talk to a number of other firms in the course of the next few weeks.

Since issuing the paper FSA has of course divided its work funtionally between the Prudential and the Conduct Business Units, as a precursor to the transition next year to the new regulators, PRA and FCA. The Financial Services Bill recognises that the management of with-profits has a unique overlap of prudential and conduct implications, and the legislation reflects this, by outlining conditions where the interests of retaining the viability of a with-profits provider might overrule the consumer protection agenda. This can be seen in FSA’s Statement where it suggests: “we are also conscious that protecting policyholders need not be achieved at the cost of the continued existence of with-profits funds and the firms that offer them”.  

FSA has of course gone on to say that many of the proposals in CP11/05 had different effects on mutuals compared to proprietary insurers, and it plans to consult on a range of areas in addition to mutual capital. These include the role of the with-profits committee, charges made to the with-profits fund, and policyholder communications. The proposals on distribution plans meanwhile have been superceded by requirements for Solvency II.

There is however much for AFM members to do now, with regard to the rules that do come into force in PS12/04, as many came into effect from 1 April. Members should review carefully and quickly their governance arrangements, and if they hold any strategic investments within the with-profits fund, or impose MVRs (market value readjustments), they should ensure these are fair to policyholders. FSA reiterates that whilst it would not expect a firm to divest a strategic investment that immediately that does not produce a fair return to policyholders by its deadline of 1 October, all firms should have reviewed their investments carefully, developed a plan and begun to discuss this with their supervisor by then.

Similarly, members open to new business should review the terms of new sales to ensure they do not disadvantage existing with-profits policyholders, whilst those with closed funds may need to review run-off plans.

At the heart of FSA’s work on with-profits is its determination to ensure policyholders rights and expectations are met. It’s never been entirely clear what those expectations are - though in our view CP11/05 certainly sought to enhance the position of with-profits policyholders at the expense of other stakeholders. The policy statement demonstrates FSA has shown itself willing to reconsider how the interests of different stakeholders are maintained, albeit the statement retains the over-riding message from the Dear CEO letters from 2009 and 2010, that with profits policyholders “will be ultimately entitled to all or almost all the assets in a mutual’s long-term fund”. This makes the identification of distinct mutual capital difficult - though happily not impossible, and AFM is very keen to work constructively with FSA to produce workable solutions.

In the meantime, if policyholders want reassurance that their expectations are better delivered in a mutual, the separate article on with-profits performance provides welcome reassurance on the superior returns available from mutuals.

 

• Other regulatory issues in brief

• Retail Distribution Review: the FSA has recently published final guidance on Simplified Advice stressing that any firms planning to adopt these processes will need to comply with RDR rules on adviser charging, scope of advice and professional standards - there are early indications that this will reduce the provision of simplified advice. FSA has also recently published a RDR Consumer Guide, which is targeted at consumers who already receive advice but who will see changes to that due to the RDR. There will be further consumer communications later in the year.

• Solvency II: members are reporting a pick up in FSA activity, as preparation for the new capital regime accelerate notwithstanding some of the delays in finalising the content of the Directive. FSA’s Business Plan and fees indicate activity will increase by 50% for smaller firms, and nearly threefold for firms completing an internal model. A recent roundtable discussion between FSA and AFM started to articulate the specific issues for mutuals - including proportionality - and we look forward to exploring these further over the coming months.

 

3. Political issues

• Diversity in financial services

The All-Party group for Financial Mutuals is made up of members of both Houses of Parliament. The group recently decided to launch an Early Day Motion, EDM 2887. This states: “That this House was greatly encouraged by the Coalition Agreement commitment to foster diversity in financial services and to promote mutuals; notes the recommendations of the July 2011 report of the All-Party Parliamentary Group for Building Societies and Financial Mutuals to that end; and calls on the Government to outline the practical steps it will take to implement the Coalition commitment.”

At the time of writing there are 35 signatories to the EDM. The aim is to achieve 50 signatories and to use this to trigger a Westminster Hall debate on the topic, where the relevant Minister would be expected to account for the work of the government in support of its commitment within the coalition agreement.

You can see the list of signatories online: EDM2887. If your local MP has not yet signed the EDM, please seek their agreement to do so. Achieving an effective debate on the role of the sector will be a very significant opportunity to broaden understanding of the role and value of mutuals across Parliament, as well as providing the chance to hear from Treasury on the work it is pursuing to foster diversity and strengthen mutuality.”

 

• Other government activity in brief

• 2012 Budget:the AFM Tax Committee met HMRC shortly after the Budget.  The main announcement for the sector related to the proposed £3,600 annual premium limit for qualifying policies; whilst the limit is unlikely to affect many investors in friendly societies or mutuals, the administration required to police the limit could be significant. HMRC indicated they will be engaging further to consider the implications more fully.

 

4. Forthcoming AFM events

• AFM Conference 2012