The design and operation of SLOC UK’s governance arrangements were unclear and inadequate, resulting in a high risk that policyholders’ interests would not be protected properly.
The firm’s governance failings came to light following two significant transactions it executed in 2008 and 2009. These transactions impacted upon one of SLOC UK’s with-profits funds, holding approximately 114,000 policies and £1.2 billion in assets. SLOC UK’s with-profits committee failed to adequately review these transactions, while its board of directors did not approve the transactions.
The FSA has not criticised the merits of these two transactions, but has found that the review and approval process followed by SLOC UK was deficient. This led to an unacceptable risk that proper independent judgement would not be applied to the transactions.
With-profits business allows firms considerable discretion in managing funds, which can give rise to potential unfair treatment of policyholders. It is critically important for firms running with-profits business to have in place clear and adequate governance arrangements. Independent challenge of management’s decisions is essential to ensure policyholders are fairly treated.
SLOC UK’s breaches occurred at a time of greater FSA focus on the with-profits sector. In September 2007, the FSA wrote to CEOs of with-profits firms drawing their attention to the need for their governance arrangements to include independent challenge of decisions concerning policyholders. The firm should, therefore, have been well aware of the FSA’s expectations in this area.
Tracey McDermott, director of enforcement at the FSA, said: “It is essential that insurers operating with-profits funds ensure policyholders are properly protected. Independent judgement must be properly applied to issues that affect the interests of policyholders.
“The firm fell below the standard required. Its with-profits committee and board, who had primary responsibility for the fair treatment of policyholders, were not adequately consulted on two significant transactions. This was an unacceptable approach to protecting policyholders.”
